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ITR Experts Say: Keep an Eye on Japan

Japan’s population declined for the eighth straight year in 2018, an unfortunate truth confirmed by the country's Internal Affairs and Communications Ministry in its annual data release last week. Population growth is a primary and vital driver of economic growth, and Japan’s negative population trends have that nation staring at a rather bleak economic future, as detailed in a recent ITR TrendsTalk by ITR President Alan Beaulieu.   

Overall population in Japan now stands at 126.4 million individuals, according to the most recent available data. This is a decline of 263.0 thousand individuals from the prior year. Even more disturbing is the decline in the working-age population (ages 15-64), which fell by 512.0 thousand to 75.5 million individuals, a 0.7% decline from the year-ago level.

For the sake of clarity, let’s put that in US terms: an equivalent 0.7% decline in the US working-age population (currently at 206.4 million) would amount to 1.44 million individuals – roughly the population of Hawaii – gone from the working population in just a year. That is the magnitude of the challenge Japan faces going forward. Fortunately for the US, our demographic woes are a little further out on the horizon, and our working-age population is still inching upward.

Why does this matter? If I were to oversimplify economic growth to two primary pillars, it would look like this:

Economic growth = Population growth + Productivity growth

Thanks to the productivity side of the equation, Japan has managed to tread water as the third largest economy in the world despite its eight straight years of overall population decline. While this is a testament to the efficiency and innovation of the Japanese people, a nation cannot override such a trend forever. The declining working-age population is especially problematic, as that cohort includes the workers, consumers, and taxpayers necessary to support Japan’s aging population base.

When I'm on the road, my keynotes typically include some discussion of ITR Economics' long-held view that a second Great Depression will arrive in the 2030s, impacting the US and other global economies. Two of the primary causes are burgeoning government debt and aging populations, which make the taxpayer piece so important. Japan is a highly indebted nation, and as of last year individuals over the age of 70 account for 20.7% of Japan’s population, the highest that percentage has ever been. No nation has a more quintessential "inverted population pyramid" than Japan, with its dearth of young workers and taxpayers at what should be the base of the pyramid. Instead, the aged, who should be at the top of the pyramid, comprise the highest head count. Who is Japan going to tax – and at what rates – to support this graying population?

The 2030s discussion is always sobering. I often get a certain follow-up question: “How do we know when the depression is starting?

I encourage our readers as well as those who attend our speaking events to follow along with us at ITR over the years to come. We will keep you updated as we get closer. However, if we do not hear from you between now and then, keep an eye on Japan in the decade to come. Due to its acute combination of debt and demographic issues, it could be the domino that ultimately tips us into the 2030s. I know we will be watching it.

 

Connor Lokar
Economist