Population Ageing in Japan: Economic Issues and Implications for SE Asia

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Population Ageing in Japan Economic Issues and
Implications for SE Asia

• David Horlacher
• Department of Economics
• Middlebury College

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Introduction

• I am grateful to Dr. Nibhon for inviting me.
• SE Asia has been noted for its success in
  reducing fertility.
• My purpose, today, is to sound a cautionary note.

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Outline of my Paper

• The population of Japan is growing smaller and
  older.
• The economy of Japan will contract over the long
  run.
• There are parallels between Japan and Southeast
  Asia.
• The experiences of Japan hold important lessons
  for Southeast Asia.

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Japans Population Will Become Smaller and Older

• Fertility is likely to decline further.
• The life expectancy of the elderly will increase.
• Migration is not likely to increase.

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The Population Will Decline

• The rate of population growth is falling.
• Soon the the population will become smaller.

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Growth Rate
.
.
7
Size
.
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The Population Will Grow Older

• The median age will increase.
• The proportion of the population aged 65 will
  increase.
• The old-age dependency rate will increase
• The proportion of the elderly aged 75 will
  increase.

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The Median Age Will Increase
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The Proportion of the Population Aged 65 Will
Increase
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The Old-Age Dependency Rate Will Increase.
12
The Proportion of the Elderly Aged 75 Will
Increase
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Fertility Is Not Likely to Increase

• The TFR is far below replacement.
• There are good reasons to expect additional
  fertility declines.

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The TFR is Far Below Replacement
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Fertility is Likely to Decline Further

• Women will have more opportunities for higher
  education and employment.
• The cost of educating children will increase.
• Fewer women will rely on their children for old
  age support.

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LE of the Elderly is Likely to Increase

• The life-expectancy of the elderly has been
  increasing.
• There are likely to be further increases because
• Lifestyles are improving.
• Government health programmes for the elderly are
  expanding

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The Life-expectancy of the Elderly is Increasing
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Migration Is Not Likely to Increase

• Foreigners are only 1 of the labour force.
• Japan would have to admit 10 million per year to
  prevent population ageing.
• In 2050, 87 of the population would be
  immigrants or their descendants.

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Summary Graph 1950-2000
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Summary Graph 2000-2050
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Japans Economic Future is Clouded

• Capital formation is slowing.
• The labour force is declining.
• Productivity growth is falling.
• Pensions and health costs will strain public
  finances.

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Japanese Saving Rates Will Fall

• The life-cycle hypothesis suggests that Japan
  will save less because its population is ageing.
• The permanent income hypothesis suggests that
  Japan will save less because its economic growth
  is slowing.

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Japanese Saving Rates are Falling
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Factors Favoring Reduced Saving

• Increasing proportion of retirees
• Increasing age of compulsory retirement
• Increasing likelihood of bequests
• Slowing of income growth

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The Future of Domestic Investment is Unclear

• As the labour force declines, the capital-labour
  ratio will increase.
• Rates of return on domestic investment will fall.
  
• However, labour costs will rise.
• Hence, producers may substitute capital for
  labour.

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Foreign Investment Will Decline

• Most models predict a significant decline in
  Japanese current account balances.
• Some models even predict current account deficits.

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Future Current Account Deficits
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The labour Force Will Decline

• The labour force is already growing smaller.
• There is little scope for increasing the LFPR of
  the elderly.

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The LFPR of the Elderly

• The LFPR of the Japanese elderly is already high.
• Raising the retirement age will
• Conflict with seniority-based wage rates.
• Increase elderly unemployment.

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LFPR of Elderly Comparison
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The LFPR of Women

• Women face major obstacles to LF participation.
• Many women suffer from discouraged unemployment.

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Productivity Growth is Falling

• Productivity growth has been declining in Japan.
• The growth rate of productivity is almost zero.

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Productivity Growth is Falling
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Public Finances Will Be Strained

• Pensions and health are taking an increasing
  share of GDP.
• As the population ages, pensions must be cut or
  payroll taxes must be increased.
• Population ageing will significantly increase
  health costs.

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Program Dependency Rates Are Rising
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Payroll Taxes Must Be Increased
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Population Ageing Will Increase Health Costs

• The share of the elderly in health care costs is
  rising.
• The 70 population accounts for 40 of medical
  spending.

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The Share of the Elderly in Health Costs is
Rising.
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SE Asia and Japan

• Japan broke new ground in population aging.
• Southeast Asia will follow a similar path with a
  50 year lag.
• Southeast Asia can learn some useful lessons from
  the experiences of Japan.

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Population Ageing in SE Asia and Japan

• SE Asia will experience almost identical trends
  in age structure-with a 50 year lag.
• Median age
• Percent of the population aged 65
• Old-age Dependency Rate

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Median Age
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Percent of the Population Aged 65
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Old-Age Dependency Rate
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Lessons for SE Asia

• Maintain a flexible labour system.
• Enable women to combine motherhood and careers.
• Be wary of investing abroad.
• Provide incentives for saving.
• Limit commitments for public pensions and health
  care.
• Index pensions to prices.

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Maintain a Flexible Labour System

• Avoid
• Lifetime employment
• Seniority-based wages
• Mandatory retirement at an early age

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Enable Women to Combine Motherhood and Careers

• Encourage child care leave.
• Give re-employment rights to women who have
  children.
• Increase day-care options.

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Be Wary of Investing Abroad

• As the labour force declines, returns to domestic
  investment will fall but
• The increased returns from investing abroad will
  be modest.
• Investing domestically will yield higher wages
  and wage-tax revenues.

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Provide Incentives for Saving

• As the population ages, savings rates are likely
  to decline.
• Incentives should be provided to encourage saving.

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Limit Commitments for Public Pensions and Health
Care

• Avoid systems that will someday become too costly
  to support.
• Accumulate substantial trust funds.

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Index Pensions to Prices

• Pension program dependency rates will rise.
• This can be offset by increasing labour
  productivity.
• But, only if pensions are indexed to prices-not
  wages.

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Summary

• Population aging in SE Asia is inevitable.
• In Japan, population ageing is leading to
  economic stagnation.
• SE Asia can avoid the same fate but only if it
  acts wisely and acts soon.

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Thank you !