Japan faces a daunting demographic challenge. Both the general populace and the working-age population are graying and rapidly decreasing in size. In recent years, the number of deaths has outpaced the number of births by around 300,000 per year. If the country’s birth rate remains constant, this figure will continue to rise by tens of thousands annually.
Today, Japan’s population is about 126 million, not counting resident aliens. This figure is due to fall to 100 million by 2048, and to just 43 million by 2110. Metropolitan Tokyo is home to 38 million people, making it by far the largest urban agglomeration in the world. If the trend toward urbanization (which, in Japan, essentially means an influx into Tokyo) continues unabated, then within three to four generations, the country will consist of a single megacity and a largely unpopulated, mountainous hinterland. The home vacancy rate, at 13 percent, illustrates this trend. Five years ago, it was only 9 percent. The further away from and less connected to Tokyo, the higher the vacancy rate.
The Japanese government predicts that the proportion of the population aged 65 and older will increase from 23 percent today to 40 percent by 2050. At the same time, those of working age (15 to 64) will make up just over 50 percent. Around 10 percent of the populace will be 15 and under. If we assume that two thirds of working-age citizens will actually be employed, it turns out that 33 percent of the population will have to do all of the work. It is not clear whether or to what extent this kind of society can be economically or financially stable.
The Japanese government is heavily indebted, and the household savings rate has been negative for the past two years. However, domestic savings are still greater than government debt. Moreover, the proportion of debt held by international creditors is low: about 10 percent. This amount, around $1 trillion, is less than the country’s foreign currency reserves. In this regard, the Japanese Finance Ministry has plausibly argued that a financial crisis will not occur in the coming years, despite aggressive money printing by the Bank of Japan, which is buying up practically all newly issued government bonds.
If we subtract the entire government debt from the nation’s total household and business assets, we find that Japan is still a very wealthy country, a situation which will continue for at least several decades to come. That said, the picture is complicated by the rapid increase in health-care costs (rising by around 4 percent annually), coupled with a stagnating gross domestic product (GDP). No sweeping solutions to reduce these costs are in sight.
Even if an imminent financial crisis is not looming, Japan’s socioeconomic model cannot rest on solid footing if demographic trends play out as projected by the government. Japan is responding to this challenge with one major decision and a series of vague announcements.
The major decision is: no immigration. Over the past several years Japan has had a political debate about the advantages and disadvantages of immigration, and numbers such as 200,000 immigrants per year in order to maintain the 100 million level became well-known reference points. However, this debate was concluded in the autumn of 2015. Refugees are accepted only in very small numbers.
Japan does not have any scoring system for potential immigrants. The country has rules for guest workers, who are permitted to enter for three years to work in certain fields with severe labor shortages and to stay longer under tight restrictions. Family immigration is generally not possible, nor is a path to citizenship.
Only the business lobby is arguing for a change in immigration policy. It is focusing on the lack of workers, especially in the construction and service sectors. These are generally low-pay, unskilled jobs that the Japanese are reluctant to do themselves. The government meets the demand for labor with guest worker programs with strict time limits. Aside from this, lobbyists are subject to the same environment as politicians: immigration is a third-rail issue – raise it at the risk of your career.
The country also takes a strict approach in its refugee policy. In 2015, while more than a million refugees flooded Europe, around 7,600 came to Japan. Of these, 27 were accepted. In 2014, the number of asylum applicants was 5,000, of which 11 were accepted. This marks a rise in the acceptance rate from 0.22 percent to 0.36 percent.
Almost all asylum seekers originated from Asia. In 2015, Nepalese comprised the largest group, with about 1,800 refugees, followed by 1,000 Indonesians, 900 Turks and 800 from Myanmar. Indonesians have seen the greatest increase in numbers. In addition to the 27 refugees officially recognized as asylum seekers, 79 individuals also received temporary residence permits for humanitarian reasons. Thus, all told, Japan has allowed some 106 refugees into the country, ten thousand times fewer than Germany, in proportion to their respective populations.
In Japan, the situation in Europe is viewed not only with astonishment and concern, but also with horror. The media regularly report on refugee treks and situations in train stations, in reception centers and temporary shelters. They have seized upon acts of violence in Paris, Cologne and other cities; the number of Japanese tourists visiting Paris has plummeted.
Tokyo’s rigid immigration policy enjoys the support of over 90 percent of the population. All parties have gotten behind the course set by Prime Minister Shinzo Abe on the issue. The argument against immigration cited by both the elites and the general population is the special Japanese lifestyle: the value system, culture and language. To the Japanese mindset, a harmonious, peacefully coexisting society is only possible through homogeneity. They take unrest in the northern suburbs of Paris as evidence of this, and since the events in Cologne on December 31, 2015, Germany is increasingly held up as an example of a society which – in Japan’s view – has given up on itself.
Even well-traveled elites speak this way, with a hint of fear over Germany’s situation. A renowned economics professor at a top university in Tokyo said that she will not attend a conference in Germany because she is afraid of being raped by migrants. Her viewpoint mirrors a general consensus that this is the end of Germany as we know it. Acceptance or admiration for the German government’s policies is practically unheard of.
Instead of German Chancellor Angela Merkel’s “we can do it” approach to accepting refugees, Prime Minister Abe announced a financial package of some $1.5 billion for countries like Syria and Iraq. Japan is primarily focused on controlling its demographic crisis from within its own borders. The Abe government is pushing initiatives aimed at increasing the birth rate, accelerating the integration of women into the workplace and raising productivity through automation.
Realistically speaking, only increased productivity could offer a real solution. Japan has enjoyed full employment for years: the number of job vacancies has exceeded the number of job seekers by 15 to 20 percent, meaning that every unemployed person who wants work will find it. However, these vacancies are almost entirely either for difficult, low-paying positions in the construction or service sectors, or those requiring a very high level of expertise, such as doctors, engineers or computer programmers. For all of the buzz surrounding “womenomics,” hardly any Japanese housewife is interested in working the night shift at a fast food restaurant for $10 an hour. In this regard, the Abe government’s proposals are essentially mere rhetoric.
If we assume that population trends will play out as projected by the government, and that immigration is also out of the question, the only lever left available to grow the economy is productivity. Japan would have to achieve continuous productivity gains of 2 to 3 percent annually in order to maintain its GDP. Those are rather high levels, but not entirely unrealistic.
The precondition is that technology must not only be available, it must also be funded and accepted. All attempts to introduce robots into healthcare, for example, have so far failed. Japan’s Ministry of Industry has played up many advanced technologies, but this is mostly bombast. Robots in telephone shops and at hotel reception desks may have made their way into the media, but these are ultimately toys whose jobs could be performed better and more cheaply by part-time human staff.
Seen from this perspective there are three possible scenarios. The first and most likely is that Japan continues to reject immigration. Its population will shrink by two thirds – from 126 million to 43 million – in four generations. A large portion of the country will be depopulated, with the majority living in a single megacity, Tokyo. It is not clear how the transitional phase will play out economically and financially over the coming years, because we have no historical parallels for comparison. Government debt and exploding health-care costs are not the only problems. Another major issue is the creeping devaluation of private property in the depopulated parts of the country.
The second possible, but less likely scenario, would see the population stabilize at 100 million. The Abe government has announced this as a goal, but it would require a drastic change in policy. Japan would need to take in 200,000 immigrants per year, while also boosting its fertility rate to 2.1 births per woman. Under these conditions, the free-fall would come to a halt and the population would level off at around 100 million by mid-century. However, the first requirement is incompatible with the universal consensus against immigration, and the second with the continuing trend towards urbanization and shifts in the value system, such as waning interest in marriage and families among young Japanese.
In the third, least likely scenario, a collapse in the financial system, followed by a massive depression could trigger a sudden and dramatic change in mindset, policy and execution. Japan has undergone two such revolutionary changes over the past 150 years – the opening up of the country in the middle of the 19th century and its reorientation after 1945. However, in the 19th and 20th centuries, it had a relatively young population, which saw new opportunities in radical change. In the 21st century, Japan’s population is much older. In addition, demographic shifts take a long time to yield substantial economic effects. Even a German-style immigration wave of one, two or three million people would not help Japan deal with severe economic and financial distress in the short term. It would take years, if not decades, to turn immigrants into productive employees.
In all three scenarios, Japan as a country will be fundamentally different than it is today. Against the backdrop of an aging, shrinking population, such radical change – so typical of young, dynamic societies eager for new opportunities – may be one of the most fascinating aspects of Japan and Asia in the 21st century.
The AEC’s fundamental goal is to promote a free, responsible and prosperous society. Through education and improving public understanding of key economic questions, the AEC promotes the idea of a free market economy and the ideal of a free society.