Japan’s Demographic Conundrum: Echoes from an Aging Nation
Japan faces a crisis. This winter, I personally experienced the imminent socioeconomic downfall of aging that world economists and demographers have been pointing to for years. Strangely enough, I noticed the increasingly visible trends of the rapidly aging economy in the lobby of a landmark hotel just outside the center of Tokyo, on the last night of 2016. I had arrived early to my family’s year-concluding dinner and was sitting on a comfortable leather sofa conveniently placed in the corner of the grand lobby. Waiting, I observed the quiet ebb and flow of customers on what should have been a busy Friday evening. The only person I saw without a strand of gray hair was the man behind the check-in counter. Even he appeared far too old to qualify for “millennial” status. On one of the busiest nights of the year, I was the only person under the age of 20 in a room that accommodated a crowd of 25 people. The eerie episode was a striking reflection of the Japanese conundrum that economists have been warning us about for decades now.
Simply put, Japan faces a dire shortage of kids and millennials, and the country is already feeling the socioeconomic consequences. The common symptoms of an aging economy have already started to take their toll: loss of national productivity, economic stagnation due to diminishing labor forces, skyrocketing national health care costs, and a deflationary cycle exacerbated by aging consumers that have held a tenacious stronghold over the Japanese economy since the beginning of its lost decades. The illness is getting worse. Japan, a home to over 50,000 centenarians (the most in the world relative to the size of the country’s general population), exhibits chilling statistics: in 2010, roughly one in four Japanese people was considered an elder – age 65 or over. By 2050, that number is projected to reach around four in every ten, highlighting a dramatic collapse of the working level population.
But what exactly are the effects, the fiscal consequences, of these so-called ‘symptoms?’ Japan’s economy is still the third largest in the world; could such a profound political and economic presence be facing such dire circumstances? A general analysis of some fiscal statistics and the downward spiral of aging economics can easily answer these questions and highlight the somewhat inevitable nature of the approaching crises.
Most prescient and telling is the general distribution of government expenditures. The way a government distributes its annual budget highlights a government’s immediate priorities, its goals and objectives, and in this case, its response to a coming economic disaster. Consider the Ministry of Finance’s 2017 government expenditure report. In this new year, the national government will spend one-third of its federal budget on social security, pension payments and other forms of government care for the elderly, spotlighting the unprecedented amount of political power and influence that the Japanese demographic over the age of 65 has on budget distribution. The overwhelming political power in the hands of the elderly sends a harshly discouraging message to the Japanese working-age demographic and youth – the essential taxpayers who fund such operations. The contributors – the taxpayers – already face scant national productivity; on top of that, they watch their contributions in taxes get distributed against their interests, as government funding is thrown into extremely generous pension funds while only 5.5% of the national budget is directed to education and science. And to combat rising health-care costs, the Japanese government has been forced to continue a wave of consumption tax hikes, a politically devastating move by Prime Minister Abe and his administration that can’t see the end of the fiscal downturn. Not to mention, Japan is also one quadrillion yen (yes… that is, 1,000,000,000,000,000) in debt, a dollar equivalent of $10.46 trillion.
Dishearteningly, combatting these economic challenges is a shrinking working-age population. Historic trends have suggested that growing populations usually correspond with growing GDPs. Such evidence from the 60’s, 70’s and 80’s, the post-war era where Japan’s asset bubble generated historically unchallenged levels of growth and revenue, would be a glimmer of hope in Japan; the country actually realized a population growth over that 30-year span. But the stark reality for the Japanese economy today is that its population and GDP are together shrinking (fertility rates are at an all-time low of 1.41 births per woman, compared to the American 1.88 and Japan’s geopolitical/economic rival, China’s 1.66). The younger Japanese generations and the working-aged middle demographic now face the responsibility of burdening a growing debt that’s never been costlier due to skyrocketing health care fees, a rapidly growing aging population that, with modern medicine and technology, are only expected to live longer, and the commonly disabused, morally-draining notion that a significant part of their working years will be committed to taking care of aging family members.
This brings us to the political angle of the debacle. The growing elderly population will be required to realize cuts in their insurance coverages, pension funds, and see an increase in their non-discretionary tax liabilities as more elders call for the limited amount of accrued government funds directed towards the old. People of this demographic, preparing for or already in retirement, understandably hold on to their financial assets. They spend later rather than now, as they realize that government assistance will only become scarcer. This effectively perpetuates Japan’s deadly deflationary cycle. Yet, lawmakers have no other choice but to succumb to these interests: they need to court the elderly in exchange for votes.
But there’s a catch: disregarding the younger generations, the demographic contributing to the nation’s productivity, is politically inviable as well. The young, the millennials, the productivity boosters, are at the core of the effort to sustain Japan’s productivity. They are the ones protecting Japan’s role as the third largest economy in the world, and they are the ones that must fight for the invaluable key towards economic recovery in the future. The problem is that they feel left behind.
This is the overarching effect of the economic crisis; a political schism generated by the fundamental issue of aging. It is the challenge the Abe administration must overcome for Japan to regain its spot as the dominant economic and political player in the Far East – a role that it’s established and coveted since it’s miraculous post-war boom, and also the explanation for the eerie scene I was part of in one of Tokyo’s landmark hotels on New Year’s Eve. To survive, the Abe administration must maximize efficiency and turn such unique economic circumstances into an opportunity to spur growth.
And here enters the renowned Abenomics policy initiative, a three-pronged approach to fiscal stimulus (manipulating taxes and expenditure), monetary easing (manipulating interest rates and money printing), and structural reforms (legal reform motivating economic growth) to combat the extreme deflationary trends of the aging Japanese economy. In short, with consumption tax hikes and near-zero interest rates, the first two arrows fired missed targets. Many experts now agree that all hope left is in structural reform.
I heard this problem most succinctly explained when in conversation with Shihoko Goto, the Senior Associate for Northeast Asia at the world-renowned policy think tank, the Woodrow Wilson International Center for Scholars.
“The biggest enemy for Japan’s growth is Japan itself,” she noted. “The greatest challenge for the administration is focusing on the third part of Abenomics – structural reform. When we talk about structural reform, social adaptation and social change play a tremendous role.”
That’s why the first step for the administration should be to get over the cultural barriers that motivate a society that has its operational roots in the ideas of filial piety. For example, in Japan, there are cultural expectations for career capable adults to dedicate their lives if need be to care for their aging parents and family rather than to compete for limited spots in long-term caregiving institutions for the elderly. Or consider the patriarchal Japanese workforce. The expectation is for career-capable women to either give up their jobs for child-rearing or not even enter the workforce to begin with. Clearly, this is productivity left on the table. Still, when asked about the administration’s efforts to somehow integrate the female workforce into the economy, Ms. Goto did acknowledge the Abe administration’s efforts to move in the right direction.
“Kudos to Abe for actually recognizing that the lack of female participation in the workplace. The fact that it has come up so prominently in the Japanese mindset is an achievement itself.” Ms. Goto said, “But this is only the beginning when it comes to women. Women themselves are very hesitant to embrace and be in the workforce.”
Therefore, we see the two-way street: legal and structural change to combat the overarching problems of an aging economy can be implemented from above, but it is up to the Japanese people to overcome the robust cultural barriers for structural reform to really be effective. And this issue of engendering a public appetite among women to actively want to join the workforce is a microcosm of the general need in Japanese society to accept social change and leave behind the antiquated Confucian ideals that for so long dictated Japanese socioeconomic standards. In this ever-globalized world, if the Japanese plan to overcome the economic challenges the nation faces, there must be some bold societal changes that the Japanese have for cultural reasons, long hidden under the rug.
But the social barriers for women trying to enter the workforce is only a microcosm of a greater concern. Resistance to social change is the central struggle of the Japanese economy. Consider another possible measure towards combatting decreased productivity due to a shrinking labor force: opening doors to foreign labor. When asked about a move towards immigration reform, Ms. Goto again addressed the interplay between the Japanese distaste of change and the need to seriously reconsider the workforce:
“There needs to be a way for Japan to accept the fact that there will be a need of outside workers to meet some of the openings that are coming up in the workforce. They must legislate so that those who are coming in are treated with respect, and encouraged to be active participants to be part of the Japanese society.”
We must see a greater government initiative to somehow break down these cultural barriers to combat the issues of aging. Immigration reform and bringing in foreign workers to both take care of the elderly and fill in increasingly prevalent openings in the jobforce would be a huge step in the right direction. But for decades, the Japanese government has set aside the politically unpopular subject of widening the openings in their borders – for an island nation that has been isolated for centuries, opening up doors to foreigners to strengthen the workforce is an idea antagonized in the country’s cultural roots. Decades of ignoring unpopular social reform has left Japan in its current debacle, and leaves it a challenge for experts to find hope.
Yet in the midst, we see glimmers of progress. Consider Japan’s biotech industry. For years, the Japanese led the world in technological innovation and manufacturing. Tech giants such as Sony, Canon or Softbank, and auto manufacturing behemoths like Toyota and Nissan have dominated world markets ever since their golden age in the 1980’s – a decade where you couldn’t drive without seeing roads dominated by Toyotas and Hondas or see people in subways without their Sony Walkmen. But now, with the help of Abenomics initiatives that aim to spur economic growth by investing in research and medical innovation, the up-and-coming hot industry in Japan is biotechnology. There has never in Japanese history been a greater demand for regenerative medicine or cell therapy, two fields at the forefront of modern biotechnology. And by passing legislation to support such an industry, the administration is in hope that the momentum they see in vibrant biotech regional metropolises such as Kobe, a historically and culturally significant port-city turned gleaming biotech mini-city, can spread across the entire nation.
And we see the same glimmers of hope in the rise of Japanese robotics. Long used in industrial settings, where robots took over the assembly line in auto manufacturing plants or technological assembly, the beauty of automation is now being applied to Japan’s biggest problems. Tech firms, such as Mitsubishi Electric Automation and other auto companies that have expanded their reach into robotics such as Honda and Toyota, have now figured out ways for robots to assist in an enormous range of caregiving from rehabilitation to full human-like interaction with patients, the most famous of which is Asimo, the human caregiving robot developed by Honda that can supposedly help with everyday activities like preparing food for elderly or going to turn off the lights in a room, and can essentially replace the role of the limited professional Japanese caregivers that are in such high demand.
Again, nascent indicators of growth should be enough for the Abe administration to realize that this industry must be at the forefront of the Japanese economy. Reports from Merrill Lynch estimate that the global personal robotics market can reach up to an equivalent of $17.4 billion by the year 2020; if Japan continues its course with automated caregiving, the industry itself could be another paved path for the Japan economy to return to the productivity it once had in the post-war boom.
But to many economists and experts, that’s where optimism ends. Top-down, government policy aiming to spur economic growth is not going to be enough to get over the multifaceted economic concerns of an aging economy. The private sector must also institute reform similar to the previously mentioned social change that is not exclusively legislative. Just as the country is unwilling to embrace Western, progressive, social ideals completely, many corporations have reservations about adapting completely capitalist models of corporate governance; this detracts from potential economic growth.
The point is, the Japanese private sector has growth potential if it can change corporate governance policy to encourage progressive corporate reform towards freer flows of talent and more risk-taking, hierarchy-challenging company structures that for decades in Japan has slowed growth.
When asked about how culturally-rooted ideas of Confucianism and filial piety play into the modern-day corporate structure, Alicia Ogawa, a consultant to international investment funds and former Salomon Brothers analyst specializing in Japanese financial markets, warned of growth-inhibiting extreme deference in the Japanese private sector.
“In Japan, you join a company and you never work anywhere else. There is also no debate about key decisions and not a lot of challenge and confrontation among management in Japanese companies.”
On the individual level, Ms. Ogawa highlighted that companies in the Japanese private sector have growth potential, but must face the serious challenges of overcoming the sociocultural values that have dictated corporate structure for decades. In Japan, the unimaginable notion of even questioning the word of a shachou, the boss of the company, goes back centuries to when Confucian ideals first shaped Japanese society. But in the modern day, the most successful companies in the world realize that the free flow of ideas vertically within company structure is essential to success and innovation.
“You need to have Japanese companies not run by old-boys’ networks,” Ms. Ogawa said, highlighting the homogeneity in Japanese management in the private sector. Japanese boardrooms are full of men in their 60’s and 70’s, and a female board member is an ever-rare sight. And though the Abe administration has set progressive targets – such as having 30% of corporate executive positions to be held by women by 2020 – not enough is being done to address the cultural gap, for example, between Japanese men and women, that for too long has protected the homogeneity of the Japanese ‘old men’s club,’ stymying Japan from reaching full productivity by tapping into the female workforce.
Again, here we see that Japanese social values must be reconsidered so as not to hinder private sector growth, an area of huge potential for the suffering, aging Japanese economy. But here, it is not only government priorities and values that need shifting – the change must come from individual firms and leaders, management and boardroom members that understand that these homogenous value systems from the old Japanese Men’s Club are slowing economic growth.
Japan needs structural reform. And structural reform requires social change. The problem is somewhat unique to the Japanese economy, a paradox that explains dreadful deflationary cycles and social and economic stagnancy: the government needs the willingness of the people to embrace change to implement legislative reform but to do so, the people would need the Abe administration to motivate the implementation of more progressive Western ideals.
I underscored this idea on a cold, rainy Monday afternoon when I was fortunate enough to sit down with Professor Stephen Roach, a Senior Fellow at the Jackson Institute of Foreign Affairs and the Yale School of Management. As I asked question after another on the dire state of the Japanese economy, the message became extremely clear: So far, the “easy,” parts of Abenomics, pumping money into the economy (monetary easing), and pulling tax levers (fiscal reform) have failed. With essentially negative interest rates, and a series of fruitless consumption tax hikes that left a bitter constituency, the two economic policy pillars of the Abenomics program did not reach the intended levels of growth.
But what about the third pillar?
“The Abe administration and Abenomics resorted so heavily on monetary and fiscal policy to avoid structural reform,” Mr. Roach said.
There it was. This recurring idea, structural reform, is the holy grail for the Japanese economy. But it is the distant nature of this holy grail, the evasive key to overcoming such economic headwinds – if there is one – that leaves experts pessimistic of Japan’s future.
As I wrapped up my time with him, I asked the professor one last question to close out a series of thoughts and responses that were all so critical of the Japanese economy.
“As a macroeconomist specializing in East Asia, are you optimistic of Japan’s future?” I asked.
Mr. Roach leaned back in his seat and let out a sigh.
“Japan has so seriously grappled with this issue for over 25 years,” he said. “They’ve tried everything but structural reform, but unfortunately, the system there is not tolerant of taking on special interest groups that structural reform requires. So, am I optimistic? Not really.”
After that, I packed my things, thanked him again, and found my way out. As I stepped out into the dark, rainy afternoon, I thought back to the last night of 2016 that I spent in the city I dearly called my home. And I wondered if it was as cold there as it felt that afternoon.