Shrinkonomics: Lessons from Japan

Gee Hee Hong and Todd Schneider of IMF in this article:

Demographic change is having a fundamental impact on the global economy—but not in the way we once thought it would.

A mere five decades ago, some observers were predicting that the human population was too big and would soon strip the world of resources, leading to mass starvation, collapse of the global economy, and a host of other ills. But the doomsday scenario of mass overpopulation did not materialize. Rather, for the first time in modern history, the world’s population is expected to virtually stop growing by the end of this century, owing in large part to falling global fertility rates.

Japan’s unique population, fertility, and immigration history make it a leading exemplar of this trend. The impact of an aging and shrinking population is already visible in everything from economic and financial performance to the shape of cities and public policy priorities (such as the long-term solvency of public pension, health care, and long-term care systems).

With demographics having such a clear and accelerating impact, Japan is the test kitchen for “shrinkonomics”—a laboratory from which other countries are beginning to draw lessons.

The IMF’s work on the Japanese economy has focused heavily on demographics in recent years—mirroring the intense debate within Japan on how best to respond to the pressures from a rapidly aging and shrinking population. While each country’s experience will be different—and prompt different solutions—some of the key macroeconomic and financial effects can be identified from Japan’s recent experience.

What makes Japan different?

On the one hand, Japan is in good company with respect to broad demographic trends. Looking across Organisation for Economic Co-operation and Development data, there are many countries with declining populations, and likely more to come. Japan is also not alone—in the region or compared with other advanced economies—with respect to having a low fertility rate, which is common across most of the Group of Seven (G7). Japan also shares with other countries an improvement in health and average lifespan. This is a common trend across most advanced economies, though Japan is certainly doing better than average.

But this is not the whole story. Japan’s unique characteristics put demographic trends (and their macroeconomic and financial impact) in sharper relief than in other countries:

Japan’s postwar baby boom was short —only about three years, compared to other G7 members, where such periods stretched anywhere from nine to twenty years. This means that Japan’s demographic structure will shift dramatically in just a few years—particularly as the boomers hit retirement age and become eligible for public pension and health care benefits.

Japan leads the world in terms of life expectancy —surpassing all Group of Twenty economies as early as 1978. Extended life expectancy, combined with low fertility, accentuates demographic change in Japan and is manifested in a steady increase in the old-age dependency ratio (the number of retired people relative to the working-age population).

Immigration flows are too small to make an impact —on aging and shrinking demographics. In comparison with other G7 economies, Japan is an outlier in terms of its very limited use of imported labor. Foreign workers accounted for only about 2.2 percent of Japan’s total labor force in 2018, compared with an estimated 17.4 percent in the United States and 17 percent in the United Kingdom.

Covid19 is making things even worse for Japan…

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