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Japan’s Demographic Time Bomb Is Imploding

Accord­ing to Ambrose Evans-Pritchard Japan is quickly turn­ing into devel­oped world’s sick­est econ­omy and could soon tip into an uncon­trolled down­ward spi­ral. Evans-Pritchard reported last week in the Tele­graph that Japan is reach­ing the point of no return where it won’t be able to meet its oblig­a­tions and could enter a debt death spiral.

While Evans-Pritchard is one of my favorite writ­ers, at the end of the arti­cle he comes to the wrong con­clu­sion about what the West should learn from Japan. Evans-Pritchard sug­gests that too much gov­ern­ment spend­ing result­ing in too much debt is the root cause of Japan’s prob­lems and that the West needs to take notice and get gov­ern­ment spend­ing under con­trol. While Evans-Pritchard is cor­rect that Japan’s debt habit is unsus­tain­able, the country’s debt prob­lems are the result of its pop­u­la­tion implod­ing and the fuse finally burn­ing out on its demo­graphic time bomb. The Land of the Ris­ing Sun is in trou­ble because it suf­fers from an insu­lar soci­ety that dis­cour­ages immi­gra­tion and implic­itly encour­ages low birth rates. For the last 50 Japan has been slowly com­mit­ting demo­graphic sep­puku and now the inevitable is tak­ing place, i.e., Japan’s pop­u­la­tion is crossed the tip­ping point so that its work force is both rel­a­tively old and shrink­ing and as a nation Japan can’t sus­tain its stan­dard of living.

It shouldn’t be a sur­prise to any­one that Japan is fac­ing defla­tion, falling domes­tic demand, stag­nant to shrink­ing GDP and, as of recently, a low national sav­ings rate. They are all the result of Japan’s bad demographics.

Vir­tu­ally all eco­nom­ics stu­dents learn that when the work force of a nation shrinks it is dif­fi­cult if not impos­si­ble to sus­tain eco­nomic growth and a vibrant econ­omy. Also, retirees tend to con­sume less than fam­i­lies that are rais­ing chil­dren and as each gen­er­a­tion ages towards retire­ment it tends to con­sume less and less caus­ing domes­tic demand to shrink. Aging pop­u­la­tions also have low sav­ings rates because most retirees con­tinue to spend (par­tic­u­larly on health­care) but stop work­ing and cash out of their retire­ment nest eggs to live.

If the Japan­ese econ­omy keeps on track­ing demo­graphic mod­els, its prob­lems will worsen until even­tu­ally a there will be an unsolv­able cri­sis. There is inevitabil­ity that Japan will con­tinue to decline and only rad­i­cal social reform will change the outcome.

The les­son that the U.S., EU and Great Britain needs to learn from Japan is that every country’s pop­u­la­tion is the feed­stock for its econ­omy and if we don’t take care to make sure our pop­u­la­tion is dynamic, healthy and grow­ing sooner or later bad eco­nomic things will hap­pen. In Japan’s case, large struc­tural deficits are the byprod­uct of bad demo­graph­ics and not the cause of its problems.

Posted in: Demographics, economy, Finance, Japan, Public Policy


  1. Julien Peter Benney

    I have long known of Japan’s many prob­lems, and it is a very inter­est­ing case study. Japan has his­tor­i­cally not had the gen­er­ous wel­fare sys­tems of Europe, Canada or New Zealand, and its pop­u­la­tion has fre­quently worked to a much older age than those nations.

    The view­point that pri­vati­sa­tion and dras­tic reduc­tions in gov­ern­ment spend­ing is the only answer to Japan’s prob­lems is one that I am famil­iar with from Aus­trian econ­o­mists like Thomas Woods. Hans-Hermann Hoppe argues that Japan’s (and Europe’s, Canada’s and New Zealand’s) demo­graphic prob­lems are them­selves the result of too-big a gov­ern­ment dis­cour­ag­ing chil­dren. How­ever, I am by no means sure that the indus­tri­al­i­sa­tion of all these nations could have had a dif­fer­ent result — sim­ply because of the pop­u­lar­ity of social­ism as soon as poor, densely-populated nations indus­tri­alise means keep­ing gov­ern­ment spend­ing at lev­els Hoppe would con­sider accept­able stands as impossible.

  2. Jason

    As a long time res­i­dent of Tokyo, I have come to feel that a declin­ing pop­u­la­tion might not be too bad. More space, more resources, more jobs and more to do for the younger gen­er­a­tion. Is there not such a thing as a ‘sus­tain­able‘ pop­u­la­tion for any cer­tain mass of liv­able land? We apply strict prin­ci­ples for forestry man­age­ment and when it gets out of whack, there are imme­di­ate con­se­quences. It is the same issue with economies: sta­bil­ity and sus­tain­abil­ity are more impor­tant than growth.

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