The Real Crisis Facing Japan: Part 3 The Solution?

This is the final part of three part series. You can read part 1 here and part 2 here.

In the first two parts this article, I have written as if Japan's demographic decline is a given, which of course it is not. Essentially, Japan has 3 potential options to solve this issue. The first is to do nothing and try to mange the decline as best as possible. The second is to allow mass migration to Japan. This would the easiest and fastest option (and the one I would personally recommend) but I don't think this is a likely option given the mood of the Japanese society. This leaves rapidly increasing the birthrate back to replacement level.

Since I think option 1 is the most likely outcome but option 3 is the most desirable (since I do not foresee mass immigration becoming a politically viable option anytime soon), I will give recommendations on what should be done now to deal with population decline and how to move towards increasing the birthrate.

The first thing that needs to be done in Japan is to increase the age at which retirement benefits start and move away from mandatory retirement. It makes absolutely no sense for workers in one of the longest lived and healthiest workforces in the world to be forced to retire at 60 or 65 whether they want to or not. This is not to say that people can't or shouldn't still retire, but just that there is no longer really a need to do so at 65.

The second thing to be addressed is defense policy. Japan should keep its pacifist constitution and refrain as much as possible from foreign entanglements. Japan's low defense burden has been a blessing to its economy despite what some politicians would have people believe. It would be insane at this point for Japan to start playing a more active military role in the world when it can least afford to do so.

The third thing that needs to be done is quickly start balancing the budget. Japan's debt burden is far too large already and if it is not fixed very soon it could spell economic disaster. Unfortunately, this will almost certainly mean higher taxes, but this could be offset somewhat if they increase the age at which people get retirement benefits and would allow workers to continue working longer. It will also require an end or at least a large reduction in subsides to agriculture and industry. The longer the Japanese government waits, the more painful these changes are going to be when they are made.

Finally, on the topic of increasing the birthrate back to replacement level. Even if this were to happen tomorrow it would still not fix the problem. It will take at least 20 years for those born today to start entering the workforce. But that doesn't help us with getting back to replacement level. Japan is by no means the only country to be facing this problem; it is just the most extreme example.

The only way things are going to change is if Japanese society changes – taking care of kids has to become a more equal burden. Basically, men will have to do more to take care of kids or the government will have to provide options for taking care of kids. Essentially, Japanese women shouldn't be punished for choosing to have children. More egalitarian Western societies tend to have higher birthrates compared to more male dominated ones.

A more egalitarian society would also have another hugely important benefit; it would allow more women to enter the workforce. Increasing female participation in the workforce is critically important if Japan wants to avoid the worst effects of a shrinking workforce. Essentially, more women working would offset some (but not all) of the decline in workers as well as increasing the tax base. This is true whether or not Japan is able to bring its fertility rate back up to replacement level.

So there we have it, the demographic issues facing Japan are its biggest problem by the simple fact that they touch on almost all other policy areas, from economic growth and public debt, to things such as defense policy and even gender politics. All of them have or will be impacted by Japan's aging and shrinking population.

As I mentioned earlier the easiest, fastest and (in my opinion) best option to solve the crisis would be to allow large scale immigration to Japan, even if it were only a temporary measure until it could get its birthrate back to replacement level. However, since I don't think this will happen, Japan is left with many difficult tasks ahead. It is going to have to become ever more automated, shifting resources away from labour and into machines and robots, while also providing retirement benefits to an ever increasing group of people, all while (hopefully) not adding too much to its debt.

Will Japan succeed? Only time will tell, but given what they have manged to overcome in the last 200 years, I would be somewhat reluctant to bet against them.

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Comments (7)

JapunditJuly 5th, 2009 at 12:18 pm

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Chris ( 6th, 2009 at 3:00 am

Interesting conclusions, but I’m going to take some potshots:

1. Raising the retirement age is quite the worst thing that could happen. Effectively you’re recommending keeping the most expensive, and least productive, segment of the workforce employed for even longer – with the inevitable result that the younger segment gets screwed on wages and conditions, and companies continue to focus their efforts on providing a comfortable and unchallenging existence for their geriatric workers. Why not simply reduce pension payouts instead?

2. The problem is less that of birthrate than marriage rate – fertility among married women is largely unchanged over the past 30 years. If married life became more attractive to (especially) women, then the birth rate should rise as a consequence. As you rightly point out, this comes down to a change in society’s attitudes towards childcare, but it also requires that young Japanese men start to make the effort to appeal as marriage material.

3. Large scale immigration is problematic. Japan, quite rightly, looks to the problems in France and Australia (to name just two) and realises that ghettoised immigration serves nobody well, either host country or immigrant. The Singaporean experiment is a model they need to focus upon – encouraging educated entrepreneurs to set up growth businesses, with tax breaks for employing local workers, etc. But we sadly know this will not happen…

4. On the subject of tax, Japan’s corporate tax rate is the highest in the world, and there is double-taxation on director bonuses – none of which exactly motivates you to run a company for profit. They need to take the hard road of tax reduction, and realise that getting 25% of a pie that is 50% bigger is better than getting 40% of a pie where every company pads their expenses and wastes cash rather than pay taxes. Without tax reform, economic growth continues to stagnate, cash gets funneled (at both corporate and government levels) to projects of marginal or negative utility, and there can logically be no link between productivity and compensation. Hard work doesn’t pay, the young have no prospects, so why bother getting married and bringing children into the equation?

The frustrating thing about Japan is not its problems. It’s the fact that the wealth of possible solutions are perpetually ignored by the government. But I’m reminded of the response ex-PM Fukuda gave when asked by a young rural voter about what he was doing to improve the lot of Japan’s youth:
“That’s your problem. I’m old, you’re young. You figure it out.”

JapanianJuly 7th, 2009 at 2:02 am

@Chris: I welcome your potshots and I will again give my opinions on them.

1. I agree that the current system does seem to screw over younger workers because there aren’t enough full time jobs opening up for them. And while I also agree that under the current system older workers are the most expensive; I am not sure about them being the least productive.

The fact is that the Japanese government needs more tax revenue and fewer expenses. This could easily be accomplished by postponing retirement for a few years. Moreover, given that there is going to be a labour shortage at some point, I think it makes sense to smooth out the decline in the workforce so there are no sudden gaps.

The best solution on this front I have read about so far comes from The Economist ( The key line: “In Japan, where pensions are Spartan and lots of people are still working in their later 60s and even 70s, big companies like Hitachi have found ways of re-employing staff after retirement – but in a different capacity and, significantly, at lower pay.”

This seems like the ideal solution to me. However, if more companies don’t adopt this sort of system the government will be forced to cut pensions, hurting those who have already retired and can no longer work the hardest.

2. I am not sure where you got your data for this one, but I will take your word for it. I was able to find this brief survey which shows that the number of children Japanese woman want (on average) is much higher than the current fertility rate. (2.48 vs 1.37)

3. I agree immigration can be a problem especially when the host society is extremely resistant to outsiders and/or there are few to no jobs available for newcomers. Countries like Canada (where I’m from) and the US have and continue to benefit from immigration but perhaps these are the exception rather than the rule. Anyways as I said in my article, large scale immigration is extremely unlikely to happen in any form so this is really a moot point.

4. I don’t want to get too much into tax policy but I will say that while Japan’s corporate tax rate is relatively high, it is not the highest in the world. . Also, correct me if I am wrong but you seem to be implying that cutting taxes will spur enough economic growth to make up for lost government revenue. If this is what you are saying, you are basically arguing in favour of the Laffer curve. Now, I am deeply skeptical about the Laffer curve but I recommend people have a look at Wikipedia’s overview of it here: and make up their own minds.

Despite my skepticism, I totally agree that a lot of projects with little – or as you say – even negative utility seem to receive cash in Japan. At the corporate level this could be caused by tax policy but at the government level this is a result of politics more than anything else.

Finally, I agree that the frustrating thing is not the problems themselves (quite frankly they can be dealt with) but the fact the government ignores all possible solutions. Your choice of quote from Fukuda perfectly sums up the governments position and (in)action dealing with the problem.

Thanks once again for your detailed and insightful comments on each of the 3 parts of this article.

mtwtfssJuly 7th, 2009 at 6:31 pm

Great article and topic. I found the comments to be just as insightful as the actual article itself. I’m not at all qualified to make any comments myself, but I do have some questions that haven’t seem to be addressed.

Most of the information given has to do with macro economics, what about the social aspect of the country? For instance, there is a growing NEET problem in the country where parents are still supporting their 20-25 year olds instead of them finding jobs because they don’t want to work. As well, while the good universities in Japan are REALLY good (ie, Tokyo, Kyoko, etc.), most of them are quite bad. Party central. Students beginning to attend University are burnt out from the strict high school and cram school environments that they don’t want to study anymore. It kind of is a backwards way of thinking. I may be simplifying, but the education system seems to need to change in order to fix some of the problems. In the past ten years, I’ve noticed a huge change in the attitude of the younger generation with regards to respecting elders and trying the best that you can. Fathers were always working so children didn’t have the attachment and appreciation they should have towards their parents.

Please correct me if I’m wrong on this point. From my experience, it seems most Japanese hide their money under their bed. Investing doesn’t seem to be a mainstream activity as in other countries. Education on Mutual Funds, ETFs, and other different financial vehicles would help grow the economy. It seems Japanese people don’t like to talk about money.

Also, with regards to overpopulation and the environment, how about food and the stripping of natural resources like trees? The Japanese eat more fish — nearly 70 kg per capita per year — than any other people ( which is one of the reasons why fish population have been depleting over the years. This is just an example of one country with regards to the problems with overpopulation. China imposed the one child rule about 20 years ago to try to fix their problem. This in turn has caused another problem of too many men now with no wives (with only one child, the Chinese actually aborted fetuses if they new the child would be a girl). There is really no clear answer.

Oh, and if you’ve ever ridden the trains in rush hour in Japan, you’d agree there’s way too many people in the big cities. Someone had his/her (not sure which) hand stuck on my ass during the entire trip. Not pleasant. Unless she was cute.

There are many things that seem backwards to us. For instance, when we buy a house (I’m in Canada as well), we expect the value of the house to go up in value. In Japan, the expectation is the home will LOSE value. About 30 years ago, housing was at an all time high with people paying about 3/4 million dollars for a small home in the countryside. You can buy a new home for $400K now. It seems the decline of value began much sooner than 4 years ago when the population began to decline.

P.S. I like the Fukuda quote. Damn! Why didn’t he just say, “Sucker!”

JapanianJuly 7th, 2009 at 11:31 pm

@mtwtfss: You bring up some good points. Obviously, I couldn’t touch on everything but I agree education is one area that is in desperate need of reform. As far as I can tell there is far too much rote learning and not enough emphasis on creativity. I think this is going to be a major problem going forward given the way the global economy works.

Also, you are correct in saying that most Japanese save rather than invest. The largest bank in the world when measured by assets is none other than the Japan Post Bank. They pay little to no interest on deposits, yet they have over $2.1 trillion (with a t) in total assets. This has resulted in bank loans in Japan being the most popular way for businesses to finance growth, rather than selling shares as they do under the American system.

Japan’s overfishing and whaling activities are certainly problems and a reduction in population should go some way towards solving them. However, as China grows richer it is demanding more seafood, with the possible result being as Japan’s demand for seafood declines along with population, China’s demand will rise to take its place.

Riding the Tokyo Metro at rush hour has to be one of the least fun things in the world due to the number of people. But I think this is why many people don’t see a problem. Cities are likely going to be the last places hit by a falling population, but they will also feel it. It just might take a bit longer. Still I have to admit, if fewer people means a less crowded train ride then there may be some benefits.

Finally, the decline in the value of housing has more to do with bursting of property bubble in the late 80s early 90s and the resulting deflation of the lost decade. A declining population should in theory, just exacerbate this trend.

Thanks for your comments.

Brand XJuly 8th, 2009 at 12:15 am

Question: Why is option 3 the most desirable? In other words, why the obsession with growth? Japan has reached its limits. A shrinking population is not necessarily a bad thing provided that the government recognizes its implications and takes steps to mitigate and adapt to the changes.

Chris ( 8th, 2009 at 9:43 am

@Brand X – it’s not an obsession with growth, it’s an obsession with slowing the decline. Japan’s population is going to shrink – that’s a given. Even if we go back to merely replacement level for the current 20-40 year-old tranche of the population, the overall population is still headed downwards. With retiree benefits paid for by workers, and the proportion of retirees rising each year, then something has to give – either higher contributions or lower payouts. A fertility rate of 1.3 exacerbates this problem considerably.

@Japanian – on point 4, the Wikipedia article is rather confused – the chart shows different numbers to the table. The Economist and OECD show Japanese corporate tax as 39-40.9%.
I’m no believer in the Laffer curve, but tax definitely leads to misallocation of assets in Japan. I meet companies every day who quite willingly admit that they spend their cashflow on marginal projects because the alternative is to pay it to the government. Double taxation on director/owner bonuses is a big disincentive to run a company for profit – you simply end up paying the government at an effective 70% rate. Any wonder that company presidents would rather blow the cashflow on hostess clubs and chalk it up to expenses?

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