Sunday, November 21, 2010

Economic Issues from Japan's Ageing Society

In 1979, Ezra Vogel, a Harvard academic, wrote a book entitled Japan as Number One: Lessons for America, in which he portrayed Japan, with its strong economy and cohesive society, as the world's most dynamic industrial nation.

Three decades later, Japan holds lessons of a less encouraging sort. Economists in the stricken West have been poring over data on the deflation that it has suffered since the bursting of the asset-price bubble in 1990. Yet deflation may be just one symptom of an even bigger problem that is squeezing the life out of the Japanese economy: aging. Unless Japan takes dramatic steps to re-energize its shrinking, greying workforce, its economy will suffer.

Other countries face this dismal prospect, too. Although Japanese society is growing older faster than anywhere else in the world, plenty of others are shuffling along behind it. Parts of Europe are aging fast, and are unwilling to adapt, as recent protests against rising retirement ages in France and Greece attest. Other Confucian countries such as South Korea, China and Taiwan, have enjoyed a "demographic dividend" -- a rapidly expanding workforce and falling birth rate -- similar to Japan's in the 1960s to 1980s. With fewer children and elderly to pay for, such countries could plow savings back into economic expansion. As in Japan, relatively few women work after becoming mothers and even fewer immigrants are let in. Such places will look to Japan for how to cope with the economic and social consequences when their manpower starts to dry up. So far, they will find, it is ducking the issue.

Many in Japan shrug off the problem of aging. That is partly because the elderly continue to live comfortably on their vast hoard of savings. Even though the number over 65 has doubled in 20 years, Japan's health-care system remains one of the cheapest and best in the rich world. And its economy, though it has now been overtaken in size by China's, remains home to a huge industrial apparatus with the innovative clout to make life easier for its elderly citizens. Anyway, what with entrenched deflation, high debt and disappointing economic growth, the Japanese have had other things to worry about in the past two decades.

Yet what Japan fails to appreciate is that, as the years pass, its economic ailments are being compounded by skewed demography. Unless the country acts to tackle this, its decline will become intractable -- for three reasons.

The crux is in the working-age population, age 15 to 64. From a peak of 87 million in 1995, it is expected to fall to about 52 million by 2050, leaving it close to its level at the end of the Second World War. Unless the output of those workers rises fast enough to offset the decline in their numbers, GDP will inevitably shrink; some predict Japan's output will be smaller than Indonesia's by the middle of this century. Declining GDP would not, in itself, be much of a worry, provided that output per person continued to rise. The trouble is that living standards are already dropping compared with other rich countries, so Japan feels poorer. And falling output may weaken Japan's sense of self-confidence and its standing in the world. What is more, Japan has the highest government debt relative to GDP in the rich world. If debt continues to grow as the economy contracts, it will become even harder to bear.

Secondly, a dwindling band of workers will have to support rising social-security payments, as the number of retired people grows. This will strain public finances. Ten years ago, each person in retirement was supported by four in work. In 10 years that burden will fall on only two workers. Already, the rising cost of caring for the elderly has pushed up the government deficit and the national debt. If Japan's workers cannot shoulder their burden, the country will find itself unable to honour fully its pension and health-care commitments. In effect, it will be forced to default on its obligations to society.

Thirdly, as the population ages and shrinks, demand will probably weaken. This would lower Japanese firms' appetite for risk and thus their willingness to invest. In growing markets, companies can afford to risk overinvesting, because excess capacity is eventually mopped up. But amid shrinking populations, that logic is turned upsidedown. Firms not only need to export more or build fewer factories; they may have to destroy idle ones. It is little wonder that Japanese companies hoard so much of their profit. The long-term outlook in their home market -- which still accounts for about two-thirds of output -- is uncertain. And yet the more they scrimp on investment, the more joblessness, especially among the young, will deepen Japan's sense of malaise.

There are ways to overcome these hurdles -- ways that would not only ensure living standards do not slip but also make for a more vibrant, inclusive economy. At present, for instance, 62 per cent of working women quit their jobs after having their first child; less discrimination against them in the workplace would encourage them to go on working. Retired people could be coaxed back to work, especially if they could claim their pensions while working. More immigration could help Japan maintain an innovative streak that it risks losing as its workers age. The hardest task will be to raise Japan's productivity to offset the looming manpower shortage. Deregulation would help, by making it easier to sell services (such as residential care) to the elderly, by freeing up finance to allow them to make better use of their savings, and by encouraging more competition in the domestic economy so that it can withstand the inevitable shocks to external trade.

All this means overcoming cultural taboos -- especially in Japan's hierarchical companies -- which for too long have been an excuse for inaction. It also demands strong political leadership, something that Naoto Kan has yet to supply, despite a clamour for fresh thinking when voters ended almost half a century of one-party rule last year. If Japan tackles its demographic problems swiftly, it has a chance of being a model of how to deal with aging, rather than a dreadful warning.



Read more: http://www.calgaryherald.com/life/greying+Japan/3861847/story.html#ixzz15yuQcPyO

http://www.calgaryherald.com/life/greying+Japan/3861847/story.html

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