Japan's 21st Century Vision.

(From Journal of Japanese Trade & Industry (JJTI))

Byline: Itoh Motoshige

Will Japan's Economy Decline as the Population Ages and the Birthrates Falls? Japan is facing a serious challenge as its society ages rapidly and the birthrate plunges. The country's population is expected to decline from 2006, and many workers are to retire from 2007. The country's production labor population (15 to 64 year olds) reached a peak 10 years ago in 1995 and has subsequently continued to turn down.

Japan's postwar systems and practices have been predicated on a constantly growing economy. Unless the country's pensions, finances, corporate hiring structures and other mechanisms change to suit today's new reality of a graying society with a low birthrate, the consequences will be dire. While the government has been working on structural reforms, many consider the speed of those reforms to be too slow.

I served as the chairman of the Competitive Power Working Group for the Cabinet Office's "Japan's 21st Century Vision." In this forum, we debated, from a range of perspectives, the issue of Japan's economic rejuvenation in relation to the long-term health of its society. In this paper, I will take up and discuss some of the points that made a particular impression on me.

In Japan and overseas, we frequently hear the pessimistic view that the aging of society and the baby bust will cause economic stagnation. To be sure, if the current state of affairs continues, and the mechanisms that are old fashioned now remain unreformed, Japan's economy will lose its vitality. The government debt and pension problems that are currently afflicting the country typify this situation. The first point on which we all agreed in the Working Group was that, if Japan were to sit back and do nothing, the country would face serious difficulties.

However, even though it is commonly believed that an aging society with a falling birthrate must lose its vitality, this does not necessarily have to be the case. A second point on which we all agreed was that implementation of social reforms designed for an aging population with a falling birthrate could further rejuvenate the economy. The invigoration of an economy or society involves a range of elements. Here though, we will consider just the simplest - the economic growth rate. Under the environment of an aging society and falling birthrate, will Japan's economic growth rate really decline? While economists have produced reams of research on economic growth, the research by Massachusetts Institute of Technology (MIT) Professor Robert Solow, winner of a Nobel Prize for Economic Sciences, is well known. According to Solow, the growth of advanced industrialized economies like the United States can be explained by two factors. One is the expansion of the productive factor, caused by such elements as population increase, improvement in the labor quality resulting from improvements in people's education levels and an increase in facilities as a result of capital accretion. The other factor is improvements in the efficiency of business methods in areas like production and distribution, and technological innovation. Solow contends that nearly 80% of the long-term economic growth trend of the industrialized nations can be explained by the second factor - production innovation and technological innovation - and that labor and capital increases account for only around 20% of growth. If this hypothesis is correct, to argue that the economic growth rate must fall just because the population decreases would be somewhat wrong.