Population Decline and Demographic Transition in Japan

The end of WWII brought to Japan half a decade of high fertility that facilitated population growth from  78 million in 1947 to its current population of 127 million. With this growth came a high percentage of working age population which gifted Japan with a large labor force providing an economically ideal climate of high savings rate and a low population of dependents.

However fertility rates have been low since the mid 1950s and the population is beginning its long awaited decrease. Furthermore the fall of the total population will have negative implications for the labor force, the savings rate, and tax policy in Japan. With these changes will come changes in consumption and an effect on Japan’s net exports.

In 2012 the first round of baby boomer turn 65. In Japan 65 is the age most workers retire and the effect will be a loss of 2 million workers over the next 3 years. The surge in retirees has implications on both the labor force and the proportion of retirees to the labor force. The increased proportion of retirees will have a negative effect on the savings rate and decrease the tax base which both lowers Government revenue and increases taxes. Finally, consumption changes that are associated with older age demographics will hurt Japanese exports as more of the labor force will focus on service oriented jobs as medical expenditures go up.

Unfortunately this is not a temporary predicament as Japenese fertility has not been at a sustainable level since 1955. Japan will continue to see a shrinking working population as far out as 2050 unless fertility improves (estimates have Japan’s population at below 100 million by 2050). As Japan’s population continues to fall the problems mentioned above will only exacerbate debt. To effectively counterbalance the loss in labor supply and a smaller savings rate Japan will eventually have to increase taxes to a level that is at or above the level of of government expenditure.

3 thoughts on “Population Decline and Demographic Transition in Japan

  1. the prof

    I’m not quite sure of the “long awaited” phrasing, to me that has a positive connotation! And note that due to demographic momentum, even if fertility rises, it won’t lead to an increase in population, only a stabilization. [OK, if Japanese women start having 5 children each, the impact is quicker and within 40 years or so large … but realistic scenarios, given very modest swings in other OECD countries, might be a fertility rate of 2.]

    I’ve done projections of the labor force based on participation rates; because so many older Japanese work, the decline will be gradual, no sharp boon for youth in 2013.

    Transferred as a page under Term Papers. Thanks!

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  2. reed

    The demography of Japan is admittedly not sustainable. Increasing more immigration would also help sustain population levels in addition to an increased fertility rate. Also the cultural development that would occur with a greater proportion of immigrants could serve to change Japanese preferences for number of children and increase fertility rates by establishing a new norm of having more children.

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  3. wilburns

    However, the language barrier could be quite staggering. As I commented in another post, immigrating to Japan isn’t like a Spanish speaker immigrating to the US. Spanish and English are obviously far closer relatives than English, Hindi, or Indonesian (apparently that’s a language!) are to Japanese. As attractive as the Japanese economy could become through monetary easing, lowering taxes, and luck, the language could be a huge problem for immigration.

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