Japan Echo Web

The Japanese Economy Amid Aging and Declining Population and Fiscal Deficits

Conclusion–for sustained economic growth

It is not easy for the Japanese economy to maintain medium-term growth under an environment of accumulated fiscal deficits and the tax reform in response. Moreover, the potential growth ability of the Japanese economy faces a higher hurdle in population aging, declining birthrate and decreasing population. Above all, it is vital to secure a stable fiscal balance and remove such risks as rising interest rates stemming from expanding national government debt. Flexible but determined implementation of tax reform that does not cause a strong negative shock to national economic activity is required in order to achieve this. Needless to say, strong political leadership will be essential.

Securing the working age population is vital for maintaining long-term sustainable growth. The time is ripe for national dialog on women and older people in the workforce as well as on proactively introducing labor force members from overseas. Naturally, we must learn a lesson from cases in the European countries suffering from the issue of social inclusion of foreign workers. Overseas investments also need to be encouraged. Unless true globalization is sought, including discussions about Japan’s participation in talks for the Trans-Pacific Partnership (TPP), which have been somewhat suspended, Japan will not attain economic growth.

There is no easy solution for how technological progress should be promoted. In that sense, we face a highly demanding response, and ultimately what is important is to make steady efforts to accumulate human capital. Patient efforts are needed for raising productivity through development and improvement in the areas of education and proactive labor market policies and by encouraging investments in human resources.

Sustained economic growth will not be achieved unless we overcome the difficult challenges of fiscal deficits and population aging combined with the declining birthrate. To hand down a strong economy to the next generation, we must press ahead by being more conscious of the fact that we are in the midst of a critical stage.

Note:

Hayashi F. and E. C. Prescott (2002) “The 1990s in Japan: a lost decade,” Review of Economic Dynamics, vol. 5.5.

OECD (2010) “Economic Outlook,” no. 89.

Kato H. (2006) “A Scale of Social Expenditure and the Roles of the Government: An Approach from the Point of View of Cross-Country Evidence,” Quarterly of Social Security Research, vol. 42, no. 1, National Institute of Population and Social Security Research.

Kato H. (2007) “Population Economics” (Nikkei Bunko), Nikkei Publishing Inc.

Kato H. (2009) “An Empirical Analysis on Population and Technological Progress,” NIRA report, “Is the Aging of Society a Threat to Japan?—Increasing Productivity in the Next Decade is the Key,” National Institute for Research Advancement.

Reinhart C. M. and K. S. Rogoff (2011) This time is different! Nikkei Business Publications, Inc.

Translated from “Shoshi-koreika jidai no shisan-unyo kankyo — Shoshi-koreika, zaisei akajika deno nihon keizai (Asset management environment in era of aging and a declining population—the Japanese economy amid an aging and declining population with fiscal deficits),” Nenkin to Keizai (pension and economy), 2011/October Vol. 30 No.3, pp. 3–9 (Courtesy of Research Institute for Politics on Pension & Aging) [October 2011]