How Japan’s ageing population is shrinking GDP

With a rapidly ageing population and a shrinking workforce, Japan is one of the world’s oldest societies. Now analysts fear that these demographics are hampering economic growth. 

Japan’s economy contracted by 0.2 per cent in the first three months of this year over the previous quarter, ending eight consecutive quarters of growth, Japan’s longest period of uninterrupted growth since 1989. It is now the only major economy to start 2018 with a shrinking economy. 

With the second-weakest performance of major economies last year — Italy had the poorest — Japan is now set to be the slowest growing of the G7 economies this year. This is despite Prime Minister Shinzo Abe’s pro-growth policies, commonly referred to as ‘Abenomics’. These measures were introduced in 2013 to counter Japan’s long-term stagnation — the country’s GDP has been among the G7’s lowest over the past 20 years, coming second only to Italy. 

But while economic stagnation in Italy is associated with record high unemployment rates and a generally weak labour market, Japan has the lowest unemployment rate among the G7 economies. The share of Japanese people of working age that are in employment is at its highest since the 1960s, with the ratio of job offers per one applicant near its 1963 all-time high of 1.6. 

Japan cannot keep up with the growth rates seen in other advanced economies because “Japan’s demographics weaken its GDP growth,” said Rob Carnell, head of research and chief economist for Asia-Pacific at ING. “A rapidly ageing population and shrinking labour force are hampering growth,” warned the IMF in its latest country’s report. 

In a separate document, the IMF calculated that “the impact of ageing could potentially drag down Japan’s average annual GDP growth by 1 percentage point over the next three decades”.

If it was not for its shrinking labour force, Japan’s economic growth would be stronger, FT research suggests. Japan’s population is smaller than it was in 2000. In contrast, there are 16 per cent more people in the US than in 2000, 13 per cent more in the UK and 21 per cent more in Canada.

Since Japan’s population began its decline in 2010, the country’s population has shrunk by about 1.3m people.

By 2065, the UN expects Japan’s population to fall by an additional 28m people, corresponding to a 22 per cent drop. Over the same period, the population in advanced economies is expected to rise by 3 per cent.

Not only is Japan’s population shrinking, but it is also ageing rapidly. Since 2000, the number of Japanese people of working age shrank by 13 per cent over the same period, while it increased by a similar proportion in the US. By 2040 more than one in three people in Japan will be over 65 years old, the highest proportion in the world. 

A shrinking population means a smaller domestic market with fewer people buying goods and services. 

In 2016, there were about 2,300 fewer kindergartens than seven years earlier as the number of pupils dropped by 18 per cent. Nearly 2,000 primary schools have been shut over the same period while the number of children of primary school age dropped by 8 per cent.

Far fewer houses are being built as the population, and demand, falls. 

The number of enterprises shrank by 31 per cent from 2006 to 2013.

The shrinkage in Japan’s population means that even with flat productivity growth there would be “steady declines in GDP output from one year to another,” said Mr Carnell. Assuming all other factors remained similar, an economy with an expanding population would see positive GDP growth. “A better way of looking at Japan would be as per capita GDP,” added Mr Carnell. 

By this measure, in the past 20 years, Japan expanded at similar rates to France and Canada and faster than Italy.

When looking at GDP growth rate per person of working age — which takes into account ageing trends as well as population shrinkage — Japan is in fact the second-best performing G7 country after Germany over the past 20 years. 

Using this measure, Japan’s annual GDP per person of working age is expected to expand at a healthy rate of more than 2 per cent. However, many older people in Japan work, so this measure is biased upwards for countries with an ageing population.

Unless demographic trends are corrected, this is unlikely to be the last time Japan will see negative GDP growth, analysts say. But, given its shrinking labour force, its economy is performing strongly, they add.

Like it? Share with your friends!

22135 shares, 843 points

What's Your Reaction?

Fake Fake
Epic Epic
Like Like

Comments 0

Your email address will not be published. Required fields are marked *

How Japan’s ageing population is shrinking GDP

MainStreet Econ

Join the MSE Community

reset password

Back to
MainStreet Econ
Choose A Format
Trivia quiz
Series of questions with right and wrong answers that intends to check knowledge
Voting to make decisions or determine opinions
Formatted Text with Embeds and Visuals
The Classic Internet Listicles
Open List
Open List
Ranked List
Ranked List
Youtube, Vimeo or Vine Embeds
Photo or GIF
GIF format

Send this to a friend