Japan: Demographic Shift Opens Door to Reforms

IMF News, February 10, 2020

Source details

Japan’s population is aging and shrinking fast.
Median age: 48.4 years.
Government projection: almost one elderly person for each person of working age by 2060.
Current population: 127 million; projected shrinkage over the same 40-year span: will shrink by over a quarter (a population loss equivalent to the entire population of Malaysia or Peru).

IMF projection for 2020 economic growth: 0.7 percent.
A recent IMF staff paper estimate: Japan’s economic growth will decline by 0.8 percentage points on average each year over the next 40 years due to demographics alone.
Women’s labor force participation has increased significantly in recent years, but demographic change will lead to fewer and older workers—depressing both growth and productivity.

Aging and shrinking population will strain public finances as age-related spending (healthcare and pensions) rises while the tax base shrinks.
Demographic trends are closely tied to low interest rates:
- Pre-retirement phase: individuals increase savings for retirement while investment remains restrained, leading to pressure for lower rates.
- Low interest rates depress profitability of financial institutions and incentivize investment in riskier assets.
Housing market effects:
- Rapid population decline has led to empty homes due to oversupply and weakening house prices, particularly in rural areas.
- These developments raise risks for the financial health of Japanese households and banks.
Conclusion: Japan’s financial sector vulnerabilities will grow as its demographic transition continues.

Strengthen the mutually-reinforcing policies of “Abenomics”: monetary easing, flexible fiscal policy, and structural reforms (particularly labor market reforms).
Monetary policy:
- Maintain the accommodative monetary policy stance, including by keeping Bank of Japan’s short- and long-term interest rate targets, to support growth and inflation.
Financial sector policies:
- Safeguard financial stability.
Fiscal policy:
- Maintain supportive near-term stimulus while ensuring fiscal sustainability.
Structural reforms (top priorities):
- Labor-market reforms to raise labor productivity and wages.
- Increase training and career opportunities for workers without lifetime employment, who are mostly women.
- Boost labor force by adding more women, older workers, and foreign workers:
- Increase child-care availability to support women’s participation in the labor force.
- Abolish firms’ right to set a mandatory retirement age to support older workers.
- Product and service sector deregulation, reforms to small- and medium-sized enterprises, and corporate governance reforms to lift productivity and investment.
- Further liberalize trade and promote foreign direct investment to support investment and growth.

A credible implementation of the reforms outlined above could offset as much as 60 percent of the predicted demographic-driven growth slowdown.
Automation can help mitigate challenges from an aging and shrinking population, particularly automation in healthcare, transportation, infrastructure, and fintech.

IMF publication note: The March 2020 issue of IMF F&D magazine will focus on the economic impact of changing demographics.

Source: Japan: Demographic Shift Opens Door to Reforms — February 10, 2020.