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.

So in reference to a discussion Hank, Professor Smitka and myself almost got into two classes ago I wanted to bring up the idea of economic growth in relation to technology. What Hank and I were questioning in class was more or less the role of technology in increasing Economic Growth. The failure of this position is determining how much technology really improves productivity thus increasing economic growth. This position has been bothering me since then. And I’ve been really driven crazy over it to the point of looking stuff up about it in class (to which I apologize professor). However, one of the latest Noahpinion posts really struck a cord with me. The post, entitled “Murphy’s Law? or, Follies of a Finite Physicist” is a must read. [continue reading] Continue reading →

Japanese manufacturers and investors are increasingly moving their operations and investments to Southeast Asia in the wake of Japan and China’s tense economic relations. The move has also been prompted by motivations to diversify investments and a strong yen and a weak domestic economy.

“Japan’s net foreign direct investment (FDI) into the 10-country Association of Southeast Asian Nations (ASEAN) more than doubled last year to a record ¥1.55 trillion ($19.5 billion), data from Japan’s Finance Ministry shows. Japan’s net FDI into China is still rising, jumping 60 percent in 2011 to a record ¥1 trillion.”

The ASEAN composes 600 million people and this too is a justification for continued Japanese investment. As the middle class grows thanks in part to Japanese investment there should be an increased demand for Japanese cars and electronics. Depending on how quickly the ASEAN region grows we should look to see Japan to continue to focus investments in the Southeast. A strong relationship with this region may also be a strategic way to limit China’s strength in Asia.

http://www.gmanetwork.com/news/story/281104/economy/business/as-china-risks-heat-up-japan-firms-turn-to-booming-southeast-asia

The annual gender gap report by the World Economic Forum has come out and Japan has placed 101st out of 135 countries. In developmental economics we have been discussing the reliable indexes for potential development. Studies of economic development in recent years have shown that the most reliable index of development is gender equality. The Japanese don’t seem to hold any regard for this statistic as demonstrated by almost no web reaction to the poll. However, based on the logic of a developmental economist improving gender equality should be one of Japan’s strategies for improved GDP growth. Furthermore, with a shrinking population getting more women to work should be a priority of the Japanese government. Getting more women to work will be an effective tool at balancing out the loss to the labor force through retirees and slow the shrinking tax base. When I went to see what could be done to improve the work rate of women in Japan I came across and article that showed that out of all industrialized countries Japan has the second highest disparity in wages for gender with women earning 30% less than men for full time employment. A focus on improving wage equality may be an effective way to increase female employment. http://economix.blogs.nytimes.com/2010/03/09/the-gender-wage-gap-around-the-world/

http://www.washingtonpost.com/blogs/worldviews/wp/2012/10/28/japan-ranks-101st-globally-for-gender-equality-but-web-users-shrug/

China which is Japan’s biggest export market has shown substantial reductions in demand for Japanese made cars. The drop in demand (by a whopping 41% for Honda, 35% for Nissan, and 49% for Toyota) is the result of the feud between China and Japan over the Senkaku islands. As if to justify this assessment polls have showed Chinese tours of Japan have dropped off by as much as 70%. The loss in revenue for Toyota is estimated at nearly half a billion dollars. Recovery for Japan’s auto industry in China is not predicted until the second quarter of next year. Unfortunately for the U.S. GM has made almost no ground in the wake of plummeting sales for rivals Honda and Toyota. The biggest gainers are BMW and Audi with respective sales increases of 55% and 20%, Mercedes also showed significant growth with a 10% sales increase. One is made to wonder though if other factors are to play since the largest growth is seen in the luxury vehicle sales. Average costs of these vehicle companies are not insignificant.

http://www.foxnews.com/world/2012/10/09/japan-economy-on-shaky-ground-after-island-spat-sends-auto-sales-plunging-gets/

http://news.investors.com/business/100912-628639-toyota-honda-general-motor-china-sales.htm

http://www.nytimes.com/2011/11/15/business/global/in-china-car-brands-evoke-an-unexpected-set-of-stereotypes.html?pagewanted=all&_r=0

As evident from the articles the professor posted it is clear that even the best and brightest economists have difficulty predicting how economic relations will change in the future. The “Containing Japan” article by James Fallows offered several notable insights on the future of the Japanese economy and relations with neighboring countries, but ultimately his thesis on needing to impose limits on the Japanese Economy proved an inadequate reaction to economic conditions at the time. The article Japanic offers serious concerns about Japan’s future, however, as we should take into consideration even the best Economic models do not account for all real variables that influence economies. Maybe hyperbole is used to draw attention to the fact that a particularly bad economic situation is a possibility. But as should be noted from the article by James Fallows our knowledge on the best Governmental policies to take in response to financial hazards is often found in hindsight.

An article by Sudeep Reddy offers an analysis for high debt economies. The risk for countries with debt at or above 100% of GDP is not as threatening as it may seem and if countries implement long term strategies most economic dangers can be contained. The main concern to this line of thinking is that long term strategies are often difficult to implement because they are viewed unfavorably by the public. Many countries including the United States only focus on short term solutions to economic woes but to be fair economic models work better in the short run than the long run.

[The Prof:

1. neat!
2. I edited the graphic to make it larger – if you view the html, you’ll see width and height settings. I boosted each by 1/3rd.
3. The post does not reference it, but underlying the debate is a deservedly famous book (well, famous among cognoscenti) by Reinhart and Rogoff, This Time is Different (2009).
4. See my comment for a bit on Fallows (I’ve been on a panel with him, among other interactions).