## Japan: Demographic Shift Opens Door to Reforms

_IMF News, February 10, 2020_

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## Bibliographic details
- Published: February 10, 2020

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### Demographic trends
- 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).

### Economic outlook and projections
- 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.

### Public finances and financial sector risks
- 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.

### Policy recommendations and priorities
- 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.

### Potential gains from reforms and automation
- 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.

### Additional note
- 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.*

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## References

- [https://www.imf.org/en/News/country-focus](https://www.imf.org/en/News/country-focus)
- [Japan: Economic Health Check](https://www.imf.org/en/videos/view/6130238118001)
- [PRESS CENTER](http://presscenter.imf.org/)
- [Read the report](https://www.imf.org/en/Publications/CR/Issues/2020/02/07/Japan-2019-Article-IV-Consultation-Press-Release-Staff-Report-and-Statement-by-the-Executive-49032)
- [Read the press release](https://www.imf.org/en/News/Articles/2020/02/07/pr2039-japan-imf-executive-board-concludes-2019-article-iv-consultation)
- [Read the selected issues](https://www.imf.org/en/Publications/CR/Issues/2020/02/07/Japan-Selected-Issues-49033)
- [Japan and the IMF](https://www.imf.org/en/Countries/JPN)
- [paper](https://www.imf.org/en/Publications/WP/Issues/2018/11/28/Macroeconomic-Effects-of-Japans-Demographics-Can-Structural-Reforms-Reverse-Them-46356)
- [low interest rates](https://www.imf.org/en/Publications/WP/Issues/2019/02/15/Demographics-and-the-Natural-Rate-of-Interest-in-Japan-46550)
- [https://www.imf.org/en/home](https://www.imf.org/en/home)

_Source: https://www.imf.org/en/news/articles/2020/02/10/na021020-japan-demographic-shift-opens-door-to-reforms_