Demographic Changes and Macroeconomic Performance: Japanese Experiences

Bank of Japan officials have been strongly emphasizing on the role of demographics in Japanese economy and recovery from the crisis. As per them, ageing Japanese population played a string role in slow recovery from the 1990s crisis. And many developed econs are in a similar Japanese position — Ageing population and deep financial crisis. hence, their recovery paths could also be slow and tardy like Japs.

This blog has continuously covered papers/speeches on demographic issues. I also wrote a paper on the topic.

BoJ goes a step further and has organised a conference on the topic. Its annual IMES conference is based on the demographic theme and its impact on macroeconomics. The papers are not still online so one has to wait.

The inaugural speech by BoJ Governor, Shirakawa is on the website. As always very interesting and more detailed than previous speeches on the topic.

The theme of this year’s conference is “demographic changes and macroeconomic performance.” On the theme, I am sure that Japan is the most notable case that provides a basis for discussion. Japan’s population and the working-age population –– that is, the population aged between 15 and 64 years –– came to decline after their peak-years in 2007 and in 1995 respectively. The share of the population aged 65 years or older rose rapidly to 23% in 2010 from 12% in 1990 (Chart 1). In the meantime, Japan’s economic growth gradually slowed during the past two decades mainly for two reasons. In the former half of the period, the Japanese economy was hobbled by the crippling effect of the burst of the bubble.

In the latter half, the rapid population aging hampered the Japanese economy through a variety of channels. In an attempt to illustrate that, I frequently rely on the cross-country comparison of growth rates including Japan. Among G-7 countries, the Japanese GDP growth rate per working-age population –– an indicator least affected by demographic changes in the  short run –– was the highest. By contrast, the Japanese per capita GDP growth rate was almost the same as the average, and the Japanese GDP growth rate, which is subject to the decreases in the total population, was below average (Chart 2). Neoclassical growth theories normally do not distinguish the overall population from the working-age population due to analytical simplicity. However, without taking into account the distinction between the two variables explicitly, the very challenges that Japan is currently faced with will be outside the scope of analysis. 

In the macroeconomic policy discussions in other economies, Japan’s experiences are frequently cited, and a lot of lessons are drawn over the past decade. However, a general conclusion obtained in such policy discussions without considering the differences in the demographic factors between Japan and other economies could sometimes be misleading.

He looks at the demographic challenge and its impact on macro. He looks at three areas of impact:

  • Economic growth rate: has become lower because of ageing population. Also mentions other impacts like changing consumption patterns (from consumer durable items to heathcare), more women in labor participation, rising fiscal deficits etc.
  • Inflation:  Over the decade of the 2000s, the population growth rate and inflation correlate positively across 24  advanced economies…The linkage to inflation is weaker but can be explained like this. Because of lower growth, inflation  expectations have also trended lower…
  • Current Account Balance: The recent deficits were a one time surprise. With ageing population, savings to be high and current account surplus to continue..

What can Japan do to address these?

  • The first option is to make various efforts to increase the labor force.
  • The second option is to adjust the supply-side structure with the ongoing changes in line with the demand pattern.
  • Third, businesses should respond to the growing demand overseas by making the most of the momentum towards globalization.

In the end:

I have explained how demographic changes affect the Japanese economy through various channels. In retrospect, up until the global credit bubble-burst, both academics and policy makers did not fully appreciate the significance of a bubble-burst. The Japanese experience of a bubble-burst tended to be underestimated as an idiosyncratic episode. Likewise, bystanders’ apprehension about the ongoing demographic changes in Japan may, I fear, be falling short of the mark.

My sense is that full apprehension of the consequences of rapid population aging, coupled with the low birth rate, is yet to be seen in light of the importance of the issue. Economics has dealt with the issue of population, not to mention a few examples such as, Petty’s Political Arithmetic or Malthus’s An Essay on the Principle of Population. For the sake of economic policy formulation, basic research on demographic changes and their policy implications is indispensable. I hope that this conference would help contribute to the accumulation of such research. Thank you.

Great speech…Looking forward to the papers in the conf.

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