Japan's Aging "Crisis"

The dark side of Japan's "aging crisis" basically revolves around the
following oft-cited concerns and "Catch 22" dilemmas;


1) Skyrocketing medical costs--additional burden on fiscal resources


2) Expanding public pension outlays--additional burden on fiscal resources


3) Growing dependency ratio (fewer and fewer younger contributors supporting more and more beneficiaries)


...while the economic growth that would be needed to expand the economy's ability to absorb these additional costs would ostensibly be impeded by;


4) Growing labor shortages that restrain output growth, and


5) A drop in the savings rate that inhibits investment and leads to falling productivity, and


6) A loss of economic vitality, or a growing inability to adapt and reform.


With demographics, the future is connected to both the past and present. Modest changes in birth rate will not immediately affect population trends, and birth rate trends over the next two decades will not directly impact the labor force (i.e., persons over 15, but mostly those aged 20 and above), nor real GDP growth rates. The number of new graduates over the next two decades is of course is dependent on the birth rate the previous two decades.


Everyone seems to agree that Japan is not alone in this dilemma, as the UN predicts that the growth rate of the world's industrialized nations will peak in 2024, while Japan's will peak in 2006 and already be decline over 20% by the time the populations of the industrialized nations as a whole peak. However, according to
calculations by NLI Research, the number of employed persons will decine by 32% in Japan between 2001 and 2050. Thus, assuming everything else (i.e., other economic factors) remain static (i.e., fixed at historical rates or relationships), the IMF calculates that real GDP will deviate from its baseline trend by -6.0% by 2050
because of aging, with the biggest negative being consumption (-4.2%).


But these and other projections are, as the IMF cautions, indicative results at best, and could vary significantly with changes in their underlying assumptions. Moreover, while the aging of Japan is the most rapid amongst its peers, we are still talking about a span of the next 50 years. Because these trends are so gradual, and
because other economic factors are dynamic instead of the assumed static, I believe Japan has a better-than-even chance of successfully dealing with the aging "crisis".


Indeed, a growing supply of skilled labor in the form of women, older workers working longer, immigration (imported workers); as well as growth in IT-related capital stock and productivity improvements, could very well alleviate or even fully offset this "aging crisis" and many of its encumbent problems.


Take for example the equation that Real GDP growth rate is equal to: a) TFP (total factor productivity) + b) labor share X labor growth rate + c) capital share X capital stock growth rate. If TFP and capital are static, then a decline in the population would reduce real GDP growth. But by this same equation, real GDP growth could be maintained if TFP and capital deepening offset the drag of the contribution from labor.