Is Japan's declining population really a problem?
Japan is unique in the world as a rich country whose absolute population is declining. Japan's 2015 census showed a population of 127,110,000, down from the 2010 figure of 128,057,352. It was the first time their population had declined since 1920.
Lots of economists feel that the falling population is a potential problem for Japan especially as it has a lot of debt. A lot - Japan's debt as a percentage of GDP is 229.2%. If the denominator (GDP) drops, the burden will get worse.
Nearly a third of Japanese are over 65. Japan has done some mild things to address this. In 2013 they raised the retirement age from 60 to 65. But is that enough in a population that has such long life expectancy? They don't want to go down the immigration route.
The answer lies in some thing called the Dependency Ratio.
What is the Dependency Ratio?
The dependency ratio is the number of dependents (children under 15 + pensioners over 64) compared to the adult working population. Here it is expressed as an equation:
As you can see straight away, having too many children to support is as expensive as having too many pensioners.
For example, the World Bank calculates Afghanistan's dependency ratio as 87% because they have so many children under 15. The lower your dependency ratio the less stressed you are. A good example is Brazil: in 1960 their ratio was 87%, and in 2015 it was 45%. As a result they are much richer than they were in the 1960's.
Japan's is moving in the opposite direction. In 1960 it was 56%, it is now 64%. Because deaths are now exceeding births in Japan, the ratio won't get too high. The difficult part with population reduction is always the period where you have a declining birthrate and an aging population, but the overall total is still rising thanks to longevity - the dependency ratio increases rapidly during this period. It is only after you get over "the hump" where the really big generation start to pass away, that things stabalise. Japan's largest ever generation were those born after WW2, and they are now starting to pass.
What about all that debt the Japanese have accrued? The good news is that it is government debt not household debt. They've hit on a novel solution - get the Japanese central bank to print Yen and use those Yen to buy the govt debt. At some point in the future the bonds held by the central bank will simply get cancelled by mutual agreement.
Isn't that a risky inflationary thing to do? Not if you have a falling population. Ageing populations and falling populations are inherently deflationary because the old don't spend much - not surprisingly Japan has been in a deflationary situation for the last 20 years as the population has aged. Printing money is only a risky thing to do if you have an increasing population like the United States or the UK. Increasing populations are inflationary, and printing money in that situation pours fuel on the fire.
Good analysis. I learned something new today on steemit. Thanks.
But what will gloom and doomers gonna say on this post?
Thanks for stopping by!
The doom and gloomers tend to think all countries are identical despite them all having very different demographic profiles. Sort of one-size-fits-all thinking. I blame lazy journalists myself!