Can Japan maintain its technological excellence in the future?
by Ramtanu Maitra on 25 Jul 2012 1 Comment

In March 2011, Japan’s east coast was hit by the largest earthquake ever recorded. The earthquake was accompanied by a monster tsunami. What followed was devastation over a large swath of land, the death of thousands, and the destruction of a part of the region’s physical infrastructure. Since then, Japan has begun to recover, but the damage in some sectors cannot be repaired quickly or even over a long period of time. One such sector is Japan’s electricity generation using nuclear power.


The earthquake-tsunami duo hit the Fukushima Nuclear Power Plant complex on Japan’s east coast and rendered major damage to six light water, boiling water reactors (BWR) designed by General Electric in the 1960s. Because of the damage to the nuclear power plants, Japanese authorities closed down all 50 nuclear power reactors in the country, causing major power shortages throughout Japan. Since then, only one nuclear reactor has gone back online. Perhaps in time a few more will, too, but it is almost a certainty that most of Japan’s nuclear power plants will remain closed for an extended period, ensuring much larger imports of oil to generate new power.


From various documentaries produced and interviews published, it is evident that a significant segment of Japan’s population does not want nuclear power plants to be reactivated. They are aware that such a decision will entail power shortages, because power plants of any kind need years to set up. This is a conscious decision made by the Japanese people, partly due to their fear of radiation, and also due to what the author believes is the “enemy” within Japan — namely the country’s aging demography, which has created a deep sense of pessimism within the population.


A reverse demographic tsunami


Japan’s population grew at its slowest rate since 1920 in the five years prior to 2010, underscoring the challenges for policy-makers struggling with the rising cost of an aging society. Japan’s population grew by 288,000 during the five years to October 2010, to a total of 128.05 million, census data show. That translates into a growth rate of 0.02 percent annually, the lowest on record and well below the 1945-1950 postwar peak of 15.3 percent (see “Japan’s Population Growth Rate Slows to Record Low” by Shinichi Saoshiro, Reuters, Feb. 25, 2011).


As a result of this slowdown in population growth, Japan is aging fast. The elderly and retired, who do not have children or grandchildren, are growing by leaps and bounds. They are much less concerned about Japan’s future than the young ones whose lives lie ahead of them. In fact, Japan’s population is aging faster than that of any other country in the world. Although most industrialized nations, particularly in Europe, are experiencing the problem of an aging population as well, Japan’s situation is comparatively hopeless.


Take, for instance, the forecast of the Japanese government itself. By 2055, the government claims, pensioners will constitute half of Japan’s population. Already, caring for the elderly accounts for half of the health budget, and Japan has a huge financial deficit. So long-term care insurance for the elderly was introduced in 2000, to help shift care out of the hospitals. Insurance premiums have been raised for the working population over the age of 40. [See “Japan Wrestles with Ageing Problem,” by Branwen Jeffreys, BBC News.]


Why is Japan graying so fast? There are a number of reasons. To begin with, Japan’s decreasing birth rates and longer lifespan have contributed significantly. To get a feel of this, one has to look at the following figures:


-        In 1950, Japan’s population was 84 million, of which those aged between 0 and 14 constituted 35.4 percent, and those over 65 were 5.1 percent.

-        In 1970, Japan’s population was 105 million, of which those aged between 0 and 14 constituted 24 percent, and the population over 65 was 7.1 percent.

-        In 1990, Japan’s population had grown to about 124 million, of which those aged between 0 and 14 constituted 18.3 percent, and those over 65 were 12 percent.

-        Ten years later, in 2000, Japan’s population amounted to around 127 million, of which those aged between 0 and 14 constituted 14.6 percent, and those over 65 were 17.3 percent.

-        In 2010, another ten years later, Japans’ population was 128 million, of which those aged between 0 and 14 were 13.2 percent, and those over 65 were 23.1 percent.


In other words, between 1950 and 1970, Japan’s population grew by almost 25 percent; between 1970 and 1990 by about 18 percent; and then, between 1990 and 2010, it grew by a paltry amount of 3 percent! At the same time, in 1950, Japan had about 4.2 million of its population aged over 65. By 2010 that age group became a formidable force of about 30 million!


Significantly, the period between 1950 and 2010 was the period of Japan’s peaceful rise from the ashes of the World War II. Japan was not involved in any war during this period and, hence, did not lose a reproductive generation on the battlefront.


But this picture does not seem to be bad enough. Demographers point out that Japan’s graying will grow further and faster and, even more ominously, the country’s population will in fact begin to dwindle. During the 1950 and 2010 period, Japan’s population grew — first at a rapid pace and then at a snail’s pace. That growth will vanish soon, and Japan will encounter declining population. By 2055, Japan’s population will dwindle to 89 million people — a decline of almost 40 million from today.


The likely impact


The working-age population in Japan will shrink so quickly that by 2050 it will be smaller than it was in 1950, when Japan’s population was 84 million, and the 15-64 age group, considered the workforce in this context, consisted of almost 50 million. In 2010, when Japan’s population stood at 128 million, the same age group consisted of almost 81 million people. That means by 2050, Japan’s workforce will be almost half of what it is today.


The impact will become even clearer in 2012, when the first members of the 1947-1949 baby-boom generation hit age 65. From then on, some believe, demography will seriously aggravate Japan’s other D-words — debt, deficits and deflation. Unless the retirement age rises in lockstep with life expectancy, aging will automatically push up pension costs, further straining public finances. [See “Into the unknown” by Henry Tricks, The Economist, Nov. 18, 2010.]


Will Japan’s economy decline rapidly because of a shortage of workers? Although such a development is likely, unlike a lot of developed countries, Japan has not forsaken its industrial heritage. It has a cohesive workforce, and it can still come up with innovative products.  


In 2010, Japan’s Ministry of Health and Welfare  pointed out that in less than five years Japan’s demographic trends will give it a population profile like that of Florida, the state in the United States where retirees have converged over the past several decades. By 2015, one in four Japanese citizens will be 65 or older. By 2010, Japan had less than 2.0 people of working age available to support both the 0-14 age group and the pensioners.


There are a number of reasons why Japan is undergoing this devastating demographic change. One is the population’s low fertility rate. “The Japanese fertility rate is now 1.35, when the rate for sustaining the population is over 2. This means that the Japanese Social Security system is doomed unless more income is poured in. The Japanese public and Japanese lawmakers are resistant to changes involving heavier taxation, but the necessary changes cannot be deferred much longer. Demography can also influence innovation. For many years, the Sony Corporation, from the Walkman to the PlayStation, showcased Japan as a global leader in innovation. This year Sony is taking a $2.9 billion red ink bath. It is being outperformed and out-innovated by its competitors, and particularly by Korean giants such as Samsung.” [See “Japanese Economy Reels Due to Strong Yen and Aging Population”: Amiel Ungar : Arutz Sheva: 2/5/2012]


Further, with public debt double its $5 trillion economy, Japan is a leading indebted industrial nation in the world. As its workforce declines, and the surplus generated by the workforce is channeled more and more to support the elderly population, Japan will find it increasingly difficult to spread its debt burden. “Social experts attribute the low population growth to factors including the high cost of raising children, more women choosing to remain in the work force rather than opt for childbirth, and the country’s reluctance to accept immigrants.” (See Shinichi Saoshiro’s article cited previously.)


Another Japanese economist pointed out that a smaller workforce and an aging population implies that the ratio of workers to non-workers will fall. The conventionally measured dependence ratio — the number of workers that must cover the dependent population of young and retired — compares the number of people in the 15-64 year old age group to all others. The fertility collapse and aging have pushed that ratio down to 1.8 this year, with a projected ratio of one worker per dependent after 2050. Were this to happen, the consequences for taxes, transfers and incentives could be enormous. Additionally, the assumption that the workforce consists of all those between the ages of 15 and 64 is suspect, because it gives no weight to schooling beyond early high school and does not consider the possibility of working beyond age 64.


There is yet another side effect. While it is evident that the cresting wave of elderly Japanese is stressing the government’s budget with their demands for health care and pensions, what is not discussed much is that the decreasing labor pool has made it difficult for Japan’s Self-Defense Forces to recruit new soldiers. All this would suggest that Japan should be retreating from international affairs. But Japan has, instead, attempted to take on more global security responsibilities, in part as a response to growing Chinese assertiveness in the region.


Why population declines


Observers cite a number of reasons why Japan’s population growth is becoming negative, the most important of which is the declining fertility rate. The population within the reproductive age group is declining because women are marrying at later ages, delaying having children once married and never marrying at all in greater numbers. Since almost all babies in Japan are born within marriage, the combination of delay and not marrying reduces fertility. [See “Japan’s Population Problem,” Oxford Analytica, 06.15.10.]  


Another reason is that women entered the labor force in greater numbers in the post-1945 years. For example, women aged 25-29 increased their labor force participation rate from 43 percent in 1970 to 75 percent 35 years later. Due to the harsh realities that Japanese business and commerce face, they have been forced to employ more women. The greater participation of women in Japan’s business and commerce indicates that a large number of Japanese women are now opting to work instead of bearing and rearing children.


Some commentators point out that women’s inequality in Japan is another important childbearing issue, especially for Japanese women who work for private businesses. Private businesses stubbornly cling to policies of expecting married women to leave their jobs, to accept comparatively poor benefits, and to not return to work. Many women wind up in low-paying and insufficient work after having children. The Japanese Civil Service has a better track record and provides decent maternity and return-to-work benefits. As a result, 80 percent of Japanese women civil servants go back to work. [See “Reasons for Japan’s low birth rate and aging population” by Elizabeth M. Young,, Jan. 23, 2012.]


Immigration: an obvious solution


The labor shortage problem that Japan faces is not wholly uncommon in the developed economies of Western Europe. These countries, however, are dealing with the problem partly by allowing more and more immigrants to come and work. But such is not the case in Japan. Despite facing an imminent labor shortage as its population ages, Japan has done little to open itself up to immigration. In fact, the government is doing the opposite, actively encouraging both foreign workers and foreign graduates of its universities and professional schools to return home, while protecting tiny interest groups. In 2009, the number of registered foreigners  in Japan fell for the first time since the government started to track annual records almost a half-century ago — shrinking 1.4 percent from a year earlier to 2.19 million people, or just 1.7 percent of Japan’s overall population of 128 million.


Experts say increased immigration is an obvious remedy to Japan’s two decades of lethargic economic growth. But instead of accepting young workers — and along with them, fresh ideas — Tokyo seems to have resigned itself to a demographic crisis that threatens to stunt the country’s economic growth, hamper efforts to deal with its chronic budget deficits and bankrupt its social security system. [See “Japan Keeps a High Wall for Foreign Labor” by Hiroko Tabuchi, The New York Times, Jan. 2, 2011.]


It is also evident that Japan has been unwilling to deal with the crisis. “From a business standpoint, right now the threat [of aging] overwhelms the opportunity,” Yoshiaki Fujimori, head of GE in Japan told the Economist. “Most people are aware of it, but they don’t know how to cope with it.” Boosting productivity to counter the effects of a shrinking workforce will require a cultural revolution, especially in business. Embracing the markets opening up in Asia will mean overcoming 150 years of mistrust of Asia.


The author is South Asian Analyst at Executive Intelligence Review

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