An Aging World = Social and Economic Timebomb

Impact
What does population decline mean for Japan’s economy and competitiveness? Firstly we must ask what IS Japan’s special quality? The North American automaker would say that it’s their automobile industry. The Japanese ‘culture’ enthusiast might exclaim that it’s obviously the Tamagachis (yes, they are still being made) and animated cartoons. The automaker and the enthusiast are somewhat on target, but they miss the underlying cause.

Japan’s advantage in the international arena is due to its large population and domestic market as well as the high concentration of companies in its industries. The sizable domestic market allows companies to test their products before going international, thereby saving costs. It also lowers unit costs as companies can adhere to the ‘bigger is better’ mantra and have economies of scale. Finally, the high concentration in industries also encourages competition through research and development, which drives up innovation.

Industries that have traditionally crutched on the domestic market, such as home electronics, will face hardship as the population dwindles. Though it is difficult to predict the implications for consumers, Japan’s place as an innovator in the realm of electronics could slip.

If a solution to Japan’s population decline isn’t found, it is expected that the labour force will drop one third from 67 million to 42 million by 2050. In turn, Japan’s large population, which is the source of the country’s competitive advantage, will be jeopardized.

Another problem of the demographic shift is that there will be more older individuals about than younger ones. This lopsided ratio would cause difficulties in funding medical insurance and pension systems.

So what’s the bright side of population decline? Japan has the smallest per capita land mass of all G-7 nations and it is bestowed with very few natural resources. Therefore, a population decline in light of these two facts would prove beneficial with fewer people fighting over the same resources and assets. Energy consumption, for instance, would decline.

[pullquote]Simply put, the unprepared will find themselves making the grim choice between their healthcare needs and food/utilities.[/pullquote]

The reduced demand due to a population decline would also lower costs of such resources and would even lead to lower property prices, which would be particularly welcome in places like Tokyo. Also, with the birth and death rates as they are, there will be fewer younger people, meaning there would be less spending needed on schools, public buildings and infrastructure. This could all mean lower taxes.

However, the current-day situation is not looking so good. Japan’s GDP per capita has decreased in conjunction with the shrinkage of the working age population. Paul Krugman cites that Japanese GDP per capita fell from 88% of US GDP per capita to 76%. Working-age adults as a percentage of population have decreased from 69.7% to 64% from 1992 to 2007.