Co-bloggers Edward Hugh and Claus Vistesen have co-authored an essay, "Japan's Looming Singularity", on the particular consequences of Japan's rapiding aging population--most notably, its shrinking work force--on the economy. Available at A Fistful of Euros as well as at Japan Economy Watch, Hugh and Vistesen make the point that Japan's particular demographic profile, characterized by sustained very low fertility, longevity, and negligible immigreation, has made Japan the first developed country to reach a particular economic state we know nothing about. How can steadily growing public debt be made to work with a shrinking work force without immiseration and worse?
The assumption that things can more or less go on and on is widespread both in and outside Japan. Despite the frequent references to “Japan’s lost decade”, the country has now lost not one, but two – what was it Oscar Wilde said, losing one child could be an accident, but losing two surely has to constitute negligence – and as things are shaping up we seem to be all set to have a third one in front of us, markets and weather permitting, always assuming the Japanese government remains able to finance its debt.
[. . .] Japan is not only an ageing society: It’s THE ageing society. Following decades of an ultra low birth rate and negligible immigration, it faces a steady decline in its working-age population and a rising dependency ratio for decades to come. There is no changing this now. Even some “miracle” reversal of the fertility problem would take decades to work through, so whatever happens next, things will get worse before they get better.
Japan’s population – in median age terms – is the oldest on the planet. Median age is around 45, and it will continue to rise. There is no real prospect of it coming back down again, since the process it is experiencing appears to be totally irreversible. Forecasts see the median age in Japan rising to more than 50 within the next two decades, and really here we are breaking totally unknown territory – no society in the whole of human history has ever been this old.
[. . . If Japan is going to see a decline in working population over the next several decades (and possibly much longer, since so long as fertility remains below replacement rate each generation will be smaller than the previous one) and if this lies at the heart of the deficient domestic demand deflation problem, then it means the issue is a deep structural one which won’t be resolved by any kind of “kick start”, however large. The only consequence of having permanent fiscal injections will be not to give stimulus, but rather an accumulation of debt that will be increasingly harder for those smaller and poorer workforces to pay down in the future – especially if the process is associated with ongoing deflation.
To use an analogy – it isn’t simply a question of a planet which has slipped off or strayed from its orbit (or “good equilibrium”), and just needs a nudge to get it back on, what we have is a planet which has veered off onto a whole new trajectory, one which leads to who knows where. This situation was never contemplated by the founders of neoclassical theory, and yet, having started in Japan, the phenomenon is now extending itself steadily across all developed economies in one measure or another.
[. . . T]hose who urge a solution to Europe’s imbalances via an increase in German fiscal deficits to stimulate consumption miss the point: arguably what people in these societies need to do is save more, not less, and certainly when it comes to the public sector.