WHY LIVING LONGER IS BAD FOR THE ECONOMY: LESSONS FROM JAPAN

“There are now more adult diapers sold than baby diapers in Japanese supermarkets.” – Business Insider


In 1870, one could only dream about living up to 40 years old. Now, it is regarded as the peak of one’s productivity. Attempts to live a longer life have shown positive results thus far, with global life expectancy reaching 71.5 in 2015 (Riley & Rosner, 2015). Given this trajectory, living to 100 years old may soon cease to be exceptional.


Even if the field of science has shown good progress, the development of socio-economic policy is still struggling to keep pace. In many More Economically Developed Countries, this higher life expectancy comes together with a lower fertility rate, and it increases the proportion of elderly in the community. This so-called demographic time bomb has led to several issues in productivity, public spending and growth.


Out of all the ‘ageing’ nations, the impact on Japan is arguably the most obvious so far. The country is faced with numerous challenges from a slowing economic growth rate to rising levels of dementia. The lessons from Japan will be crucial for other ageing countries to prepare their institutions to embrace this change.


Background



As we can see in the diagram above, Japan has a relatively lower fertility rate compared to the rest of the world. Its rate is falling gradually as the number of marriages decline over time in the country (The Economist, 2014). The Japanese tend to postpone marriage until later in their life or opt not to be bounded in the commitment at all.


Furthermore, inadequate child support aggravates the challenges of raising a child inherent to a country with such high costs of living. Likewise, the support toward women in the labour force is minimal and many are forced to resign should they decide to be a mother. Given these social conditions, couples that choose to have babies will be disadvantaged and many will, in the end, choose not to have one.


Responding to the Demographic Change


Scientific development has successfully helped us to live a healthier and longer life. But it has not yet found a significant way to sustain our productivity as we age. The data shown by the Nikkei Asian Review (2017) forecasts that the working population in Japan will plunge 40% from 2015 levels by 2065. This shrinking workforce pushed Shinzo Abe to raise Japan’s retirement age beyond 65 (Financial Times, 2018). Besides maintaining stability in the labour force, allowing the elderly to enter the labour force could potentially increase the spending rate in the economy and give a desperately needed push to generate growth.


However, encouraging spending in an ageing nation is not that simple. According to Professor Naoyuki Yoshino from the Asian Development Bank Institute (2018), the elderly in Japan spend less than the younger population due to their different consumption preferences. Their spending becomes primarily concentrated on basic necessities such as food and healthcare, making the impact of higher incomes amongst the elderly on aggregate expenditure more tenuous.


This also places increased strain on government policy, as lower consumption by the elderly makes it more difficult for the government to achieve their policy goals. At the macro level, the Japanese government has pursued a grand policy blueprint, the three arrows of Abenomics, to spur the economy. This package includes fiscal stimulus through huge infrastructure spending, monetary easing and structural reformation. Abenomics has made some progress, pushing Japan’s nominal GDP back into a positive trend as shown below. Still, the inflation rate remains below the 2% target and the Bank of Japan is still very pessimistic about achieving this aim (Japan Times, 2018). This may force the Japanese government to pursue ever higher levels of spending, increasing their budget deficit, exacerbating already high levels of debt.


Spending aside, it is equally important to consider the effect of the change on social welfare. Most of the Japanese elderly rely on government support, resulting in two-thirds of Japan’s budget for social benefits going to the elderly population (The Economist, 2017). This transfer payment works well in maintaining the welfare of the older demographic but it brings about harmful and unsustainable consequences in return. First of all, the government is not investing productively as the transfer payments are a reward given without output produced in return. As a result, it will escalate the burden placed on the working-population to fund this spending, as mentioned by Hikariko Ono, a Japanese government spokesperson (101 East Al Jazeera, 2012). Besides that, economically productive individuals will also bear the social responsibility of taking care of their elder dependences and it often means that they need to compromise on their career. This is shown in the country’s rapidly increasing dependency ratio over the past 10 years, exceeding the world average in 2009.




Structural Reformation


As the problem influences the economy in both the short and long term, the solutions should just as well cover both time dimensions. Though Abenomics has shown some progress, the main issues ailing the economy are neither fiscal nor monetary in nature, but are instead structural deficiencies. Hence, it has not yet established a credible and sustainable solution for the country’s longevity.


The key towards sustainable and long-term improvement lies in the success of the third Abenomics arrow, structural reformation. The Government of Japan (2017) has released different growth strategies that it will implement in various different sectors.


Firstly, investment on innovation and technology, which will play a major role in bringing Japan back on track (East 101 Al Jazeera, 2012). Assistance from robotics and artificial intelligence provides support for the elderly to live independently as well as replacing the loss in labour force potential. They also give opportunities for younger individuals to pursue their careers by lessening the social burden placed on them to care for the elderly. Along with larger fiscal spending on education, Japan can hope to improve both its capital and labour, and – ultimately – economic productivity.


Secondly, the government introduced a scheme to empower women in the workforce. According to The Government of Japan (2017), from 2012 to 2016, 1.5 million additional female workers joined the workforce, which can substantially increase the economy’s productive capacity.


Subsequently, the strategy also includes a few measures on market liberalization. This includes slashing corporation tax and deregulating, in order to encourage business start-ups. This measure, if successful, will produce more domestic enterprises and investment, which will be beneficial in inducing economic growth.


In addition, measures were actually proposed to capture international opportunities to build the economy. It encourages more Foreign Direct Investment (FDI) inflows by providing a business-friendly environment and pushing for more Foreign Trade Agreements (FTA), such as the TPP. According to The Government of Japan (2017), inward FDI is expected to reach 35 trillion yen in 2020, a 43% increase from the comparative amount in 2015. The government also forecasts that Japan’s FTA coverage ratio, which is below 40%, will rise further to 45.5% by 2018. However, of course, the success of this will depend on progress in trade negotiations and the ongoing trade war. Engaging with the international market remains crucial for the Japanese, considering the country’s deteriorating domestic markets.


Naturally, structural reform entails a time lag before the Japanese economy sees the benefits of these policies. One immediate alternative to structural reform is increasing net migration to the economy. However, it seems like the government is not in favor of this proposal. Dallin Jack from The University of Chicago (2016) argues that strong nationalist sentiments amongst Japanese people makes large-scale immigration politically unpopular.


Furthermore, an interview by 101 East Al-Jazeera with Miyoko Miyazawa, a local nurse in Japan, also shows that the language and culture are two potential barriers that make it difficult to let more people in. Furthermore, even with an optimistic increase in the fertility rate, Japan still needs at least 200,000 immigrants a year in order to meet its lowest population benchmark of 100 million people (Jack, 2016).


Conclusion


Slowly but surely, Japan’s economy is catching up. Its growth in the second quarter of 2018 reached 1.9%, exceeding its 1.4% target (BBC News, 2018). However, the reformation needed in order to sustain higher growth and escape economic stagnation will take a significant amount of time and considerable changes in the society.


The cases occurring in Japan can be used by many developed economies that are on the verge of a similar situation to reassess their preparations to embrace this demographic change. Equivalently, the consequences of an ageing population in Japan could be better handled now if previous governments possessed adequate foresight to target the structural flaws of the economy before they became entrenched.


In the end, instead of addressing the question of whether we will be able to live a longer life, it is time to start thinking whether we will have all the tools necessary to support a longer, better life.


Khalif Pradansyah

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