Unfavorable Demographics are Burdening Japan's Future

Alexandra HARNEY
Visiting Scholar, RIETI

Amid the rush of excitement over Abenomics this year, investors and commentators have overlooked the central fault line in Japan's future: demographics.

Over the next century, if current trends continue, Japan's population will fall by two-thirds. By about 2200, the Japanese population will be fewer than 15 million, down from 127.8 million in 2011.

The enormous economic costs that this transition will impose on the working-age Japanese population for subsequent generations theoretically should have pushed the low fertility rate and medical and pension systems issues to the top of politicians' agendas.

Politics, however, does not work like that, especially in a country where six out of 10 voters are over 50 years old. Fearful of losing the elderly vote, Japanese politicians skirt discussions on pension or medical reform, particularly during the election season. At the same time, Japan has managed to keep the level of benefits given to families almost as stingy as that of the United States.

Low fertility is a structural issue

These issues must eventually be addressed. What are the causes of Japan's rapid aging and low fertility; what are the near- and mid-term effects of these phenomena; and what can be done to cushion the blow to future generations?

The seeds of Japan's low fertility were planted in the years following the brief baby boom after World War II. Between 1947 and 1957, the total fertility rate halved from 4.54 to 2.04 children per woman. As Japan's economy grew rapidly in the 1960s, the fertility rate ticked up above the crucial threshold of 2.1 (the level necessary to maintain a stable population) until the oil shocks of the early 1970s.

Thus began a fall that, with minor exceptions, has continued ever since. While Japan's total fertility rate of 1.41 is above that of some of its Asian neighbors?Taiwan, South Korea, Singapore and Hong Kong?it is still not high enough to keep the population stable. Although low fertility is a relatively modern phenomenon, no country whose fertility rate has fallen below 1.5 has ever managed to lift it back above that threshold.

The causes of Japan's low fertility since the 1970s have long been debated among academics. What is clear, however, is that the drivers are largely economic. In other words, Japan's low fertility is a structural problem, woven into the fabric of its economy and society.

Economic insecurity is leading to the collapse of the institution of marriage

Demographers and sociologists generally agree that the leading cause of Japan's low fertility is the decline of marriage as an institution. Once a country where nearly everyone married, Japan is now a place where people struggle to pair off. Nearly half of men in their early 30s and one-third of women in their early 30s are still single. In a substantial contrast with the past, one in five men are unmarried at the age of 50.

Other developed countries have also seen a decline in marriage rates. The difference in Japan is that marriage is an almost non-negotiable precondition for having children. Only 2% of babies are born out of wedlock in Japan, compared to 40% in the United States and nearly half in the United Kingdom. Japanese people are also marrying later, with obvious implications for fertility.

What, then, has led to the collapse of marriage? Research suggests that one reason for both the decline in the number of marriages and the fall in the number of couples with children is economic insecurity. As the traditional Japanese social contract?where a university degree was a near-guarantee of a stable job, often for life?has crumbled for all but the most elite students over the past two decades, an underclass of contract employees (hiseiki shain) has emerged. Japanese women don't look kindly on such employees: Marriage rates among male hiseiki shain in their early 30s at just 30%, half of that of seiki shain or staff hires.

Simply put, inequality is a driver of low fertility in Japan. The rise of information technology, globalization, and the emergence of low-cost labor from China and other countries are all factors that have nudged inequality higher in Japan as in other countries.

But changes in Japan's labor market away from the lifetime employment system toward a two-tiered system of employees in first class and business class seats (seiki shain) and those in economy class seats (hiseiki shain) have made it harder for some men to marry and start families. The clear consequence for Japan is that as the costs of caring for a growing elderly population increase, the burden on every working Japanese, particularly the young, will grow.

This threatens to become a vicious cycle, as limited public resources (or regulations) lead to constraints on the supply of facilities for the elderly, which forces more people, primarily women, to choose between having more children and caring for their aging parents, or between working and caring for their parents.

Alleviating the burden on future generations

How should policymakers respond? There are no easy answers as Japan is in uncharted territory. No country has ever aged as quickly.

There are still several ways Japan could address the structural causes of low fertility and lighten the load that future generations must carry. The first is to incentivize?through the tax system and government subsidies?companies to dismantle the two-tiered hiring system and seniority-based pay. By doling out the richest rewards to the longest serving staff members, rather than the most talented or productive ones, companies are discouraging young people from marrying and having children.

Policy should also encourage more mid-career hiring, which would help women return to the workforce and support families that want to have more children. Japan's rigid hiring practices are not only out of step with global realities. They are also exacerbating the country's demographic problems.

Second, Japan must take on its elderly voters and make bold, clear moves to shore up the pension system and rationalize the health care system. Both are too generous to be sustainable. Young Japanese, knowing they will never receive as much as they are paying into the public pension system, are opting not to contribute. A quiet crisis of faith in these crucial public programs will undermine every economic growth strategy?even Abenomics?until the government addresses the problem directly.

Finally, the government must do away with the ineffectual jidoteate stipends given to families with children 15 years old and under, and introduce smart regulations that allow a substantial increase in childcare capacity in big cities. At the same time, it must focus on ways to increase the shortage of nurses and caregivers at nursing homes across the country. The government is moving to address these issues, but not nearly with the necessary urgency.

Japan has an opportunity in the coming decades to set an example for other aging countries in Europe and Asia. These are not problems that Japan can choose to ignore. Adverse demographics are putting the country's long-term survival on the line.

June 11, 2013

June 11, 2013

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