Population Decrease, Aging, and Japan's Long-Term Economic Outlook to 2050

Tatsuya Ishikawa 

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With Japan's population projected to decline and age until 2050, this paper examines how the macroeconomy will change in the context of the open economy. We present a baseline scenario for the economy, focusing on economic growth and the current account surplus.

That Japan's population will start to decline in the near future is a certainty. This poses serious problems for today's social and economic systems. Since most of them are implicitly conditioned on the sustained expansion of the population and economy, they may not function as effectively under a shrinking population and economy. Similarly, present corporate behavior patterns and individual values and attitudes, formed during an era of positive growth, will all need to adapt to the new era of negative growth, or even replaced.

To be sure, a declining population does not necessarily entail negative economic growth. Productivity growth can still boost GDP per capita, and if large enough, even overcome the effect of population decline.

In principle, by skillfully manipulating social policies, it is possible to boost the birth rate and slow the rate of population decline. In the sense that the future holds many possibilities, we need not summarily dismiss the possibility of averting population growth and the associated economic consequences.

But at the same time, the future is connected to both past and present. Modest changes in the birth rate will not immediately affect population trends; birth rate trends over the next two decades will not directly impact the labor force (persons at least age 15, and mostly those age 20 and above) nor real GDP growth rates. What will determine the number of new graduates entering the labor force in the next two decades is the birth rate during the previous two decades -- which is why the labor supply's decline is unavoidable. Of course, the growing labor supply of women and elderly persons, growth in IT-related capital stock, and productivity improvements can help boost the economy's potential growth rate in the future. Nonetheless, these factors are not isolated from the present capital stock level, or from income and productivity levels relative to the rest of the world. In addition, economic factors are affected in varying degrees by population decline and aging.

When considering the reforms and innovations needed to build a better future, we should not assume that desired reforms and convenient conditions will occur naturally. We must not intentionally make optimistic expectations that would rule out the need for fundamental reforms, nor harbor overly pessimistic expectations that are unfounded. Our discussion should start by objectively determining how the economy, given its built-in autonomous mechanisms, will transform as the population declines under the present social system.

This paper focus specifically on the effects of population decline and aging, the possibility for capital stock growth, and Japan's interrelationship with foreign economies in the context of the open economy. After describing trends in the population and labor force, we consider their effect on the savings rate and capital stock accumulation, and present an outlook for economic growth over the next 50 years.

Tatsuya Ishikawa

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