Japan's Aging Economics

Milton Ezrati

From Foreign Affairs, May/ June 1997

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Summary:  In less than five years Japan will have a population profile like Florida's. Indeed, Japan's population is aging faster than that of any other country. A future with only two workers for each retiree will force radical change. It will shrink savings, turn the trade surplus to deficit, and drive more industry overseas. These demographic and economic factors will push Japan toward an increasingly independent foreign policy, causing friction with America. Tokyo and Washington must seek new arrangements cognizant of a maturing Japan.

Milton Ezrati is Chief Investment Officer at Nomura Capital Management, Inc., New York.

JAPAN'S DEMOGRAPHIC CRISIS

Japan's population is aging faster than that of any other country in the world. The unprecedented increase in retirees relative to the size of Japan's work force will force radical change if the nation is to avoid a fiscal crisis, or worse. These seemingly innocent demographic changes will force Japan to shrink its famously high savings rate, reverse its proud trade surplus, send more industry overseas, liberalize its tightly controlled markets, and take on a more active, high-profile foreign policy. Ultimately, these changes will shift the balance of power in East Asia.

Japan's demographic problem has its roots in decreasing birth rates and longer lifespans. The former have begun to starve the country for young workers to replace those retiring, while the latter ensure that a growing population of retired citizens will be dependent on a diminishing working population. Although every industrialized country faces this problem, Japan's situation is by far the worst, not least because Japan has no hope of an influx of youthful immigrants to mitigate the problem. According to Japan's Ministry of Health and Welfare, in less than five years the country's demographic trends will give it a population profile like Florida's. By 2015, one in four Japanese citizens will be 65 or older. In about 2010, according to official projections, Japan will have fewer than half the workers per retiree it has today, a mere 2.5 people of working age for every pensioner. And since not all of working age choose to work or can find employment, it is likely that in the early 21st century Japan will have fewer than two people at work for every retiree.

Such a large proportion of pensioners is unprecedented in history and will place a heavy burden on Japanese society. The huge elderly population will redirect increasing amounts of the nation's resources into geriatric health care, but more generally, the strain will grow because retired people continue to consume even as they cease to produce in the conventional sense of the word. Whether the retirees draw on well-funded pension plans, savings, or the public dole, everything they consume must be produced by the existing work force. It will be asking a lot of Japan's shrinking work force to support this large and growing pool of retirees as well as themselves, their children, and, given Japanese custom, their dependent spouses. Even if workers' productivity rapidly accelerates, the demands of these dependents will absorb much of the surplus.

Every two Japanese workers will effectively support the burden of about one retiree. And that support will exceed that of a dutiful child caring for aging parents (of which there are many in Japan). Since the burden is countrywide, there is no way for one group to pass it off on another. It will also be far-ranging in the economy, including all medical costs, not just insurance premiums and deductibles. In terms of aggregate income, this demographic situation could ultimately cut the average Japanese standard of living by 18 ...

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