Japanese Economic Update – January 2015

Japan is in the midst of major demographic changes, which have had significant implications for its economy and will continue to do so. Japan’s population is already declining, and with its society also ageing the drag on the workforce is potentially even greater.

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Japan’s demographic trajectory

  • Japan is in the midst of major demographic changes, which have had significant implications for its economy and will continue to do so. Japan’s population is already declining, and with its society also ageing the drag on the workforce is potentially even greater.
  • A clear implication of Japan’s demographics is a lower GDP growth rate. Without an improvement in the rate of productivity growth, GDP growth will remain at very low levels; it could even turn negative in the decades ahead.
  • Changing demographics are also placing downward pressure on household savings and Government finances (although corporate savings have offset these two trends to some extent). This in turn will likely reduce the current account balance, although the impact on the current account is not necessarily clear cut and may change over time (particularly as other countries also experience demographic change).
  • The pressure on the Government’s finances is of particular concern given Japan’s poor current budget and debt position. If Japan is too slow to make the necessary adjustments (which the demographic changes make more difficult) the risk is that a loss of confidence in Japan’s ability to repay its debt will cause a spike in interest rates.
  • Ageing may have also been a factor behind Japan’s low interest rates, although other factors such as BoJ monetary policy are at play. It is less clear that it explains Japan’s long deflation.
  • Aside from these big macro impacts, demographic changes will affect many aspects of the economy (which will affect social structures as well).
  • There is no ‘right’ population level and adjustment to a declining population is possible. Individuals can work longer if necessary so measures of increasing ‘burden’ (based on a fixed definition of ‘working age’) can be misleading. The issue is whether society is willing to adjust.

For further analysis download the full report.