Some thoughts on the demographics of Japan and path dependency

I learned from any number of sources, from E-mails and from blogs and from the "News" section of my Feedly news feed, that the demographics of Japan have entered a new phase. The population is now in sharp decline. From the CBC:

Japan's latest census confirmed the hard reality long ago signalled by shuttered shops and abandoned villages across the country: the population is shrinking.

Japan's population stood at 127.1 million last fall, down 0.7 per cent from 128.1 million in 2010, according to results of the 2015 census, released Friday. The 947,000 decline in the population in the last five years was the first since the once-every-five-years count started in 1920.

Unable to count on a growing market and labour force to power economic expansion, the government has drawn up urgent measures to counter the falling birth rate.

Prime Minister Shinzo Abe has made preventing a decline below 100 million a top priority. But population experts say it would be virtually impossible to prevent that even if the birth rate rose to Abe's target of 1.8 children per woman from the current birthrate of 1.4.

Without a substantial increase in the birthrate or loosening of staunch Japanese resistance to immigration, the population is forecast to fall to about 108 million by 2050 and to 87 million by 2060.

Bloomberg went into more detail.

Tokyo, Japan’s capital, had the highest municipal population with 13.5 million. The city also recorded the biggest increase in population after Okinawa prefecture. Osaka, the country’s second biggest city, is among 39 prefectures and cities that had a decline in population.

The ratio of Japan’s 1,719 municipalities that had a drop in population expanded to 82 percent in 2015, from 77 percent in 2010. The number of households rose 2.8 percent to 53.4 million with the number of people per household dropping to 2.38 from 2.46 over the five-year period.

Statistics Japan's latest estimates estimate a decline of nearly 200 thousand people between the 1st of September, 2015, and the 1st of February of this year. This Japanese-language PDF apparently goes into more detail about the particulars.

Tokyo, the reports note, continues to grow on the balance of net migration, but away from Tokyo decay is real. I would again like to recommend to our readers Tokyo-based blogger Richard Hendy's sadly inactive blog Spike Japan, a compilation of tours throughout different Japanese regions which have entered terminal or near-terminal declines, something that he plausibly enough blames on demographics. With fertility rates far below replacement levels, large-scale migration of the young out of declining areas, the rapid aging of the remaining population, and next to no foreign immigration, it's difficult to imagine how some peripheral areas could ever be revived.

It's increasingly difficult to imagine how Japan as a whole will revive. Jacob M. Schlesinger's November 2015 Wall Street Journal "Tokyo’s Test: Policy vs. Demographics" noted the challenge for the country.

In May 2012, [Masaaki Shirakawa, the governor of the Bank of Japan from 2008 through 2013] delivered a widely cited speech titled “Demographic Changes and Macroeconomic Performance: Japanese Experiences.” In it, he cited global evidence that “the population growth rate and inflation correlate positively,” a finding he called “a sharp contrast with the recently waning correlation between money growth and inflation.” In other words, a country like Japan with a shrinking population was inevitably condemned to slow growth and deflation, and central banks were impotent to fight it.

[. . .]

Just over two and a half years into his term, [new Abenomics-era governor Haruhiko Kuroda] has delivered well on the first pledge, with two rounds of “quantitative and qualitative easing” that more than doubled the BOJ’s asset-purchase plan used to create fresh liquidity. The jury is still out on his second pledge, to end deflation and revive Japan’s economy.

The bad news: Japan’s gross domestic product contracted for the two consecutive quarters ended Sept. 30, pushing the country into recession for the second time during Mr. Kuroda’s brief term. Some of that results from cyclical problems and policy missteps outside Mr. Kuroda’s control: the slowdown in China, an ill-timed sales tax hike. But some stems from the fact that economy’s capacity to expand is constrained when the workforce is shrinking, making recessions much more common.

The battle to break deflation has also struggled, due both to falling oil prices and the slow growth that has damped price pressures. After some early success in pushing the most closely watched inflation gauge above 1%, deflation returned over the summer, and the Japanese government reported Friday that the consumer-price index was negative in October for the third month in a row.

But the BOJ released Friday its own preferred measure—stripping out prices for food, energy and other items that the central bank considers distorting of underlying trends—that showed inflation rising in October at a more robust positive 1.2% annual rate. The aggressive monetary policy has also helped create the tightest job market in a generation, with a separate Friday report showing the unemployment rate dropping to an eye-popping 3.1%. That, in turn, has helped expand the labor market by prompting employers to find more ways to use older workers conventionally considered past retirement age. The jump in employment in Japan by those 65 years and older has kept the size of its labor force fairly stable, even as the classically defined “working-age population” has contracted. Whether Japan’s newly aggressive monetary policy can really overcome the demographic drag hinges on whether Japanese companies can be persuaded to invest more at home. An economy’s ability to grow is rooted in the expansion of its labor force, combined with the ability to boost its labor productivity, or output per worker. Productivity can be lifted by investment in labor-enhancing equipment.

Could this investment be enough? It depends, Schlesinger concludes, on the Japanese government being able to successfully alter the perceptions of business about the dire business environment. Whether or not this is achievable, particularly in the context of Japan's increasingly adverse demographics, is another issue entirely. Yes, it's possible that Japan might successfully implement a partial roboticization of its economy to cope this these challenges. Whether the technological improvements necessary will arrive in time is another question entirely.

How is Japan dealing with its demographics issues? Not very well. See Isabel Reynolds' October 2015 report noting that Abe's proposed policies for dealing with Japan's demographic issues have not been successful: substantial immigration remains impossible, child care and elderly care programs are not funded to meet the demand, women and especially mothers have substantial problems in the work force, Japan's population continues to drift towards Tokyo Metropolis. A scandal recently erupted over paternity leave, when parliamentarian Kenzuke Miyazaki was criticized for taking paternity leave and then resigned following revelations of an affair. Traditional gender norms seem to still be in effect, removing any possibility of change, certainly any hope of the Nordic-like near-replacement fertility wanted by Abe. Japan's immigration policies, as the report of Bloomberg's Yoshiaki Nohara and Jie Ma about Japan's much-criticized foreign-technical internship program illustrates, remain exploitative, and seem likely to deter immigration.

Back in 2010, Hendy wondered if Japan was stuck in a downwards spiral.

It might just be, however, that despite recent evidence to the contrary, Japan has embarked on a vicious demographic spiral, in which a variety of complex feedback mechanisms set to work: aging results in declining international competitiveness, which results in greater economic hardship at home, which results in a suppressed birthrate; aging results in ballooning fiscal deficits, which in the absence of debt issuance must result in higher taxes or cuts to government spending, which cause economic pain, driving down the birthrate; aging, as the elderly dissave, results in a decline in the pool of domestic savings on which government borrowing is an implied claim, reducing room for fiscal maneuver and resulting in less ability to withstand exogenous shocks; aging further entrenches conservative attitudes to everything from pension reform to immigration, resulting in greater government outlays and smaller government receipts; aging leads the electorate to fear for the future of the pension system, resulting in more saving by the economically active, depressing consumption, which drives manufacturers offshore and raises unemployment, which is strongly correlated with the birthrate.

I would argue that we are seeing just this sort of thing. Certainly the downward demographic spiral is continuing, with inadequate signs as of yet that Japan is going to be making the cultural and institutional changes needed to foster a revival in fertility rates. The new normal in Japan might well be low overall fertility, some people having only small families, some opting not to have children together.

Even if there was a miraculous revival tomorrow to replacement-level fertility, there would still be a huge trough in Japanese demographics, a lack of potential workers and consumers, that could only be plausibly filled by immigration. There, too, Japan is lacking. I have blogged here about the example of South Korea, where the total stock of foreign-born residents is not only comparable to that of Japan despite South Korea's population being only 40% of the size, but where the national government is actively encouraging immigration. Would radical change be enough? Japan could have been a destination for migration flows for some time--I remember reading in the English translation of Robert Guillain's The Japanese Challenge about how some industrialists wanted to bring in Taiwanese guest workers as early as the 1960s--but Japan has explicitly chosen to deter migration. In this context, networks of migrants and migration have formed without Japan, potentially leaving it outside. Might Japan open the doors and find out that the people who might otherwise have come to Japan opted for the more familiar Korea, or China, or who knows where else instead? It's possible.

How can Japan escape its demographic trap, break from its existing path? I straightforwardly admit bafflement. I only hope that the people running one of the world's largest economies will do better than me.