It is well-understood by now that Japan’s population is both shrinking and aging, with potentially wide-ranging and largely negative economic effects–most notably lower savings and growth, ano higher government spending (on health, pensions and long-term care), deficits and debt. It is also clear that many other countries will soon find themselves in similar situations, incluring some, notably China, that will do so at significantly lower levels of per capital income than Japan. Thus, how Japan deals with its demographic problems should be of significant interest to others around the world.
The Abe administration is largely seeking to offset declines in the labor force by removing barriers to higher labor force participation by women and older people, two groups that participate at lower rates than in many other advanced economies. Immigration is largely seen as a non-starter. And some nod is given to the potential for technology to play a larger role.
But with Japan’s population projected to shrink from 127 million today to 88 million by 2065 (and just 51 million by 2115), with those 65 and over accounting for nearly 40 percent of the population, it would seem a fairly dramatic reimagining of Japanese society may be eventually needed.
While discussions around Japan’s future often focus on its strong cultural influences and the limits that places on plausible changes (e.g. on the acceptance of sizable immigration or deep changes on the role of women in society) it’s useful to keep in mind that Japan has managed to reinvent itself on several occasions–most notably after the forced opening of the country in the 1860s and the physical and institutional reconstruction that took place after World War II. It both cases, Japan was able to adapt quickly and to do so largely based on explicit policy decisions.
In this context, it may be useful–or at least interesting–to think of some fundamental changes we may see in Japan in the coming decades, that is, some plausible (and not mutually exclusive) “future Japans”:
- A worker-friendly Japan. To limit the decline in the labor force and raise productivity enough to matter, the world of work in Japan will need to change dramatically. Factors that limit or disincentivize labor force participation by women and older workers need to be addressed. But, more flexibility is needed in work schedules and modes (e.g. work at home), better work-life balance, less reliance on lifetime employment and seniority-based wages with a corresponding strengthening of social safety nets and job training, and a move to equal opportunity and pay. Early steps are not confidence-building. Recent efforts to place limits on overtime concluded with such a limit–100 hours per month! Meanwhile, the first “premium Friday”–a nationwide effort to get workers to leave their offices early one Friday per month–did not see many takers. Obviously, much more needs to be done, and government should take the lead, at least to generate demonstration effects.
- A cyborg Japan. Japan is already among the global leaders in the use of robots, drones and other labor-saving technologies, not just in manufacturing, but also in sectors as varied as child and elder care and construction (see chart from the Financial Times, below). But much more may be needed. The situation in Japan is still quite different from many other advanced economies, where robots raise concerns about job loss. Rather, with massive labor shortages looming, there may eventually be little political resistance to moving further long this path–in particular if immigration remains largely off the table.
- A more global Japan. Another way Japan can deal with a shrinking workforce would be to make greater use of workers elsewhere. In particular, we are likely to see the trend of outsourcing (see chart from the latest IMF staff report, below) accelerating further. As with tech aolutions, some of the angst about the hollowing out of manufacturing sectors may be softened by the lack of workers willing and able to fill those jobs domestically, especially if Japan manages to keep the highest value-added activities within the country.
- A diverse Japan. Most observers in and outside of Japan view as highly unlikely the possibility of Japan increasing in a significant way, its reliance on foreign workers. The stock of foreign workers remains tiny, at less than 1 million, with a significant chunk of that being foreign students who work part-time. But it’s worth noting that recent public opinion surveys are not entirely negative, with about half the respondents supporting the acceptance of immigrants “who wish to settle down in Japan ( see chart). In the same surveys, younger Japanese appear significantly more open to foreigners. Might views eventually move further in this direction as labor shortages and fiscal deficits become more severe? If Japan does choose to go down this route, it would likely need to be accompanied by changes in many rules regarding foreign residents, education, including language education, and notions of citizenship. Even what it means to be Japanese will be questioned.
In reality, all of these Japans may need to become reality. Some can substitute for others–e.g. robots or foreign workers can help fill labor shortages–where others can be complements–a Japan more open to foreigners may also help Japan successfully invest in other countries. And these changes can have wide-ranging effects, both good and bad–for example with regard to income inequality–which may be difficult to predict well in advance.