Look at Japan and you see the future of many OECD countries. Extreme demographic shifts are re-sculpting the country in dramatic ways, defining future challenges and demanding new policy responses. These changes follow on two difficult decades for Japan, with chronic deflation, large budget deficits and extensive public debt. Yet, at least one of the factors fuelling Japan’s present situation is an unmitigated success story—a population that lives longer than in any other country in the world. Other challenges, such as the decreasing population of rural and many urban areas, represent opportunities to increase quality of life. But whether any of these opportunities play out will depend on Japan’s policy response. These issues and many others are discussed in the OECD Territorial Review: Japan 2016, presented by OECD Secretary-General Angel Gurría this week in Tokyo.
Japan’s population is both shrinking and ageing very rapidly
Japan’s population peaked in 2010 at just over 128 million beginning what is projected to be a sustained and increasingly steep decline. Simultaneously, Japan’s population is ageing rapidly. From 1950 to 2015, the share of population age 65+ grew from just under 5% to over 25%. This is the highest such figure, worldwide. The population aged 80+ has risen even faster, from 0.4% in 1950 to 7.3% in 2013 (OECD average = 4.1%). Japan’s median age was 45.9 years in 2013, compared to a world average of 29 years and an OECD median age of 38.7 for the same year. Based on current projections, the Japanese government expects Japan’s population to decrease by 22-23% between 2010 and 2050, with the elderly (65+ years) accounting for 40% of the population.
As Japan goes, so goes much of the OECD
While Japan’s ageing population outpaces other countries, the elderly dependence ratio has risen in all OECD countries over recent decades. To some degree, to look at Japan today is to see the future challenges awaiting many countries in the developed world. According to OECD population projections, the populations of at least six OECD countries will be more than 10% below their peak by 2050 and twelve will have elderly dependency ratios in excess of 50%.
Japan’s low fertility rates can be addressed by labour market reforms
Labour-market segmentation and issues regarding work-life balance contribute to Japan’s demographic challenges. Large wage discrepancies between full-time salaried employment and non-standard employment create a preference for employment in Japan’s largest firms, predominantly found in highly-concentrated urban areas. The income of a household headed by a regular worker aged 45-49 is more than four times that of a household headed by a non-regular worker. This is in part responsible for the influx of roughly 100,000 primarily 15-29 year-olds into the Greater Tokyo region each year, which adds to the disproportionate ageing of rural areas (the highest in the OECD). What’s more, fertility rates are significantly lower in Japan’s concentrated urban areas compared to less concentrated mixed or rural regions. Japan’s culture of long working hours can discourage women with children from seeking high paying jobs just as extreme population density in urban areas can be a factor in limiting family size. A lack of child care infrastructure, particularly in urban areas, also makes it hard to reconcile work and family life. Japan is addressing these issues with policies that favour better work-life balance.
Economic impact of demographic change: from ageing to longevity
By 2013, there were fewer than 2.5 people of working age for every one above the age of 65, down from 11 in the 1950s. By 2050, this number is projected to fall below 1.33. Japanese workers must shoulder an increasing burden if the country is to sustain the growth of per capita living standards in the context of a rapidly growing inactive population. However, an OECD study (Oliveira Martins et al. 2005) suggests that the economic impact of ageing depends in large measure on how longevity gains are managed. A holistic approach to reforms to support healthier ageing, longer careers, more efficient healthcare provision and other measures, can help to offset economic impacts of Japan’s ageing population. Ageing can also create opportunities such as demand for goods and services and new market opportunities related to the so-called “silver economy”.
Immigration remains an untapped vector of growth
Migration is one of the major drivers of population dynamics in any country. But in 2010, Japan’s foreign-born population was just under 1.7% of the total, far below the levels found in OECD countries. Migration can help population dynamics by shoring up population numbers and by introducing new sources of innovation and entrepreneurship. Although some progress has been made in this direction, this form of growth remains largely untapped in Japan.
Productivity in the face of declining population
Productivity is inextricably linked to population change. Reviving productivity growth is an urgent economic priority for Japan. To achieve continued prosperity in an ageing economy, output per worker must rise faster than would be necessary in a different demographic context. In productivity terms, Japan will have to run faster simply to maintain its position vis-à-vis other economies. Presently, through its National Spatial Strategy, Japan is implementing bold policies towards a new vision of a compact, networked Japan. The goal is to maintain and even grow productivity, ensure a high level of public service in populous and less populous areas and reconfigure infrastructure to optimise the well-being of a shrinking population. With similar challenges looming in much of the developed world, many countries may wish to take a page from Japan’s policy playbook.