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.