ΙΜF:F&D: Shrinkonomics

Japan is the world’s laboratory for drawing policy lessons on aging, dwindling populations

Dear Colleague, According to the World Health Organization, the greying sector of society, and those with pre-existing medical conditions like asthma, diabetes and heart disease, appear to be the most vulnerable to becoming severely ill with coronavirus. This discovery accelerates the urgency to prepare for a world where the elderly will make up a larger and larger share of the global population.  To recap last week's feature article, we talked about how we expect to add 1 billion people aged 65+ over the next three to four decades, atop the more than 700 million older people we have today. Among this population, the group aged 85+ is growing especially fast and is projected to surpass half a billion in the next 80 years. And while the coronavirus continues to serve as a stark reminder of how old age, poor health and the need for quality care intersect in a time of crisis, the implications of an aging society go well beyond health. That's what I'm here to discuss this week—the bigger picture—because Japan is the world’s laboratory for drawing policy lessons on aging, dwindling populations. In Japan, 28 percent of the population is 65 and over—triple the world average. By 2050, 29 countries and territories will have larger elder shares than Japan has today. In fact, the Republic of Korea’s elder share will eventually overtake Japan’s, reaching the historically unprecedented level of 38.1 percent. 3 key features about Japan Japan’s unique characteristics put demographic trends (and their macroeconomic and financial impact) in sharp contrast with 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 G20 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 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. What is Shrinkonomics? Aging and dwindling populations can have a direct impact on a country’s labor force and labor markets—particularly the size of the working-age population. Demographic change has been a driving force in Japan’s labor market for several decades. Japan’s potential labor force—those between ages 15 and 64 as a share of the total population—peaked in 1991–93 at just under 70 percent. Since that time, however, the potential labor force has fallen quickly to just above 59 percent, the lowest level among the Group of Seven countries and well below levels seen in the mid-1950s. Given current low fertility and accelerating death rates, this ratio is expected to continue to decline well into the medium term. With a limited inflow of foreign workers, this implies insufficient workers to maintain current levels of economic activity. Such a linear view of the future is more dire than Japan’s experience, however. The continued demand for labor has spurred both more women and more elderly (those outside the traditional 15–64 working age) to join the labor force. Automation, artificial intelligence, and robotics, including technology to increase productivity per worker, will also be critical to Japan’s response to shrinkonomics. A more elderly and reduced population—which means relatively more retirees, a smaller labor force, and a shrinking labor-based tax pool—also points to the challenge of financing social security. As the population ages, public spending on health care, long-term care, and pensions naturally rises. But in a shrinkonomics context, in which the active, taxpaying labor force is in decline, financing this rise in public spending can be problematic. Japan’s challenges are particularly severe, given that the entire baby-boom population is passing the 75-year milestone in just three years (starting in 2022 and ending in 2025) and the country’s public debt as a share of GDP is already the highest in the world. The need to act Japan, arguably the farthest along a demographic transition among the G20 in its struggle with shrinkonomics, is effectively the world’s policy laboratory. Authors Gee Hee Hong and Todd Schneider of the IMF's Asia and Pacific Department propose a number of actions that not only apply to Japan, but other countries too as they bump up against similar societal shifts.  A long-term view on public finances is needed that fully incorporates the impact and cost of an aging population and shrinking workforce. Early adjustment—particularly for such sensitive areas as public pensions, health care, and long-term care—is critical. The potential negative impact of shrinkonomics on productivity and growth highlights the need to rethink the fundamentals. Labor market flexibility and strategies to ensure high productivity growth (including the use of automation, robotics, and artificial intelligence) are key, as well as a more flexible view with respect to aging and retirement. Interested in the full article? Read it here. Continuing our coverage of the March issue of F&D on demographics, next week I'll dig deeper into Singapore’s experience in trying to raise its fertility rate, and what other countries can learn from their efforts. Thank you again for your interest in F&D. If you have any questions, comments or ideas for future stories, please feel free to write to me directly. I look forward to hearing from you. Take good care, Rahim Kanani Digital Editor, F&D Magazine International Monetary Fund rkanani@imf.org P.S. If you're looking for the latest IMF thinking, research and analysis on the global economic impact of COVID-19, click here.