Global Japan: 2050 Simulations and Strategies

Project Objectives

Japan Faces the Risk of National Decline

Japan has become a “no-growth economy,” with basically unchanged nominal GDP over the past 20 years. National government debt has reached the level of 200% of Japan’s total GDP, and public finance and social security are on the verge of crisis. The issue of long-term energy restrictions has also arisen following the unparalleled earthquake and tsunami that struck northeast Japan in March 2011.

Along with these challenges, Japan’s society is also undergoing a major population decline. The nation’s dwindling birthrate and aging population—both occurring at a faster pace than anywhere else in the world—will exert an immense impact on the economy and society as a whole. There is even a fear that if the situation continues, Japan could fall from its position as a developed country, reverting to being just a small nation in the Far East. Japan could be described as a “forerunner” globally in terms of being among the first to confront a whole host of issues, including the question of how to respond to a shrinking and aging population, strengthen growth potential, and reform public finances and social security.

The twenty-first century has been described as the century of the Asia Pacific. China in particular, backed by its enormous population, continues to enjoy high growth. And the United States, for its part, has managed to maintain socioeconomic dynamism and exceptional population growth for a developed country. Against this background, people are questioning how Japan can maintain the vitality of its society and economy, and realize an affluent life for its citizens. But it must be recognized, at the same time, that Japan is ideally positioned in the center of the Asia-Pacific region. 

Preparing for the Future Now

The first step for Japan is to take a candid and direct look at its current situation, and strive to resolve the mountain of issues it faces. In addition to fostering an environment in which each citizen can make a full effort, it is imperative for Japan to tap into the vitality of the Asia-Pacific region. We need to employ such measures so that Japan can continue to be an affluent and attractive place—rather than passing along our problems so that future generations have to deal with them. 

Based on an awareness of these issues, the 21st Century Public Policy Institute decided to create “simulations” of what the global economy and Japanese public finances will be like circa 2050, and to clarify the issues that Japan must tackle and that must be raised for wider public awareness. We have also compiled into a report the findings from our discussions with experts on such fields as the economy, industry, employment, taxes, public finances, social security, foreign policy, and national security.

Implementing policies to create a “strong Japan” is the responsibility of politicians. However, Japanese politics is now in disarray. We at the institute earnestly hope that Japan’s political leaders will seriously consider the issues raised in this report when advancing their policies.  

Global Economy Simulations

The simulations we conducted on the state of the global economy and of Japan’s public finances in the period leading up to 2050 constitute the premises for our recommendations regarding the issues Japan should tackle in preparation for that future. In order to make economic predictions for 50 countries over a period stretching to 2050, we had to take into consideration exchange-rate fluctuations and estimate supply-side factors related to potential growth (labor force and population; capital and investment; and productivity). And we examined each of these supply side assumptions individually.

First, with regard to labor force and population, Japan’s population is aging more quickly than anywhere else in the world. By 2050, its population will fall below 100 million, of whom 38.8% will be 65 or older. The labor force will fall at an even faster pace by that same year, dropping by over 21 million, for a total of 44 million workers.

Projected Population of Japan

(Unit: 1 million)

Source: Median variant estimate released in 2012 by the National Institute of Population and Social Security Research

Projected Labor Force of Japan

(Unit: 1 million)

Source: Median variant estimate released in 2012 by the National Institute of Population and Social Security Research

Second, with regard to capital and investment, the level of savings will decrease as the population ages, thus lowering the level of investment as well; this means that we can expect the pace of capital accumulation to slow down.

Finally, there is the third assumption regarding the factor of production. Our projections are based on a 1.2% annual increase in production, which was the average among developed countries between 2000 and 2009.

Those were the key assumptions for the four scenarios we created for the Japanese economy, as follows:

1. Base Scenario 1: Japan’s productivity growth rate recovers to the developed countries average of 1.2% (corresponding to a 0.8% growth rate for gross domestic product).
2. Base Scenario 2: Continuation of the two “lost decades; namely, by 2050 productivity growth rate stabilizes at the 1991–2020 average of 0.5% (corresponding to 0.3% GDP growth)
3. Pessimistic Scenario: Economic growth worsens due to deteriorating public finances; productivity growth rate falls to –0.3% by 2050, 1.5% below Base Scenario 1 (corresponding to –0.2% GDP growth, which is 1.0% below Base Scenario 1).(*1)
4. Improved Labor Force Scenario: Assumption is that women’s participation in the labor force increases to levels currently seen in Sweden; for example, participation of 40 to 44 year old women increases from 72.5% in 2020 to 90.5% in 2040).

Productivity Growth Rates for the Japanese Economy by Scenario

(Corresponding GDP growth rates in parentheses)

The exchange rates used in the above simulations are based on fluctuations of purchasing power parity rates for 2005 that take into account the correlation between PPP rates and market rates. For example, the ratio between the market rate and the PPP rate in China’s case was 0.42 for 2005 (GDP per capita in China was $4,115 when calculated using market rates, and $1,731 using PPP rates). In our simulations, this ratio is expected to increase to 0.68 by 2050 as the nation becomes wealthier. In general, we assume that the ratio approaches one as GDP per capita increases.

Results of Global Economy Simulations

Negative GDP Growth from 2030

Even if production recovers, the impact of an aging population will be significant, and under all scenarios GDP growth is negative after 2030. There is even a fear that economic growth could remain negative indefinitely in a worst-case situation where public finances collapse. Population decline will have an enormous impact on Japan, with two elements—labor and capital—exerting continuous downward pressure on the GDP growth rate in the medium to long term. In 2050, China, the United States, and India will have the largest GDP rates in the world. Meanwhile, Japan’s GDP will drop below the level seen in 2010, placing fourth in the world according to Base Scenario 1. That figure will be one sixth that of China and the United States, and less than a third that of India. Japan’s presence on the world stage will be significantly diminished.

Breakdown of GDP Growth Rates for Japan

World GDP Rankings

(Unit: 1$ billion; PPP rates used in conversions; numbers in parentheses indicate ratio to Japan)

 *In addition to the four scenarios above, pessimistic scenarios for developing nations and European nations were also considered.

 GDP Per Capita; Overtaken By South Korea?

Japan Public Finance Simulations

In order to simulate the situation for Japan’s public finances leading all the way to 2050, a variety of inputs were included, such as the Cabinet Office’s medium- to long-term calculations for growth up to fiscal 2023, and the global economy simulations for fiscal 2024 and thereafter described above. The results show that even if the consumption tax rate is increased to 10% by fiscal 2015, government debt will reach 600% of GDP by 2050 unless additional measures are taken to improve the state of government revenue and expenditures. These simulations do not take into consideration the capacity for the government to issue more government bonds. Government policy is to stabilize public debt levels from 2020 onwards. In order to achieve this, debt levels will have to be reduced by an amount equivalent to 1% of GDP every year (in 2011 that was around ¥5 trillion) for 10 years starting in 2016. This would be a 9.5% improvement in the balance of payments. According to the simulations, a consumption tax rate of 24.7% would achieve this. Cutting expenditures and using other taxes, however, may make it unnecessary to raise the rate that high.

Fundamental Changes Affecting the World Circa 2050

There are four fundamental changes that will affect the world circa 2050:

1. An increase in global population. (A population increase from roughly 7 billion in 2010 to over 9 billion by 2050 will take place.)
2. Further globalization and greater use of information technology. (Due to greater global interdependence, shocks experienced in specific countries will reverberate around the world, as already seen in the case of the collapse of Lehman Brothers and the impact of the Great East Japan Earthquake on supply chains. There will be a greater focus on highly skilled workers, which may widen income gaps.)
3. The arrival of the “Asian century”—most notably the rise of China. (By 2025 China will overtake the United States to become the largest economy in the world, but the country faces political risks and could fall into the “middle-income trap.”)
4. Strain in resource supply and demand. (It will become increasingly difficult to supply or obtain energy, food, and water resources.)

By 2050, 38.8% of Japan’s population will be over 65 years old, and 24.6% over 75. If Asia’s growth continues until 2050, its GDP will represent half that of the entire world, thereby averting the danger of Asia falling into the middle-income trap.

Proposals

Based on the simulations of the global economy and Japan’s public finances, and taking into consideration the fundamental changes the world will have undergone by 2050, we have identified below four key tasks—or long-term visions—that we believe Japan must address in order to prosper.

Maximizing Human Resources

The first task concerns maximizing human resources; given Japan’s lack of natural resources, this will be a key to growth. It is necessary to fundamentally rethink the twentieth century–style concepts that have held sway, such as forcing people to choose between work or child-raising, or the assumption that post-retirement life should just be a life of leisure. Japan needs to foster an environment that enables everyone to participate in the workforce—including young people, women, the elderly, and foreign nationals. As the simulations show, Japan’s economy will be seriously impacted by the graying population and resulting reduction in the labor force. It is imperative that the available human resources, including men and women of all age groups, are maximized in order to minimize that negative impact. Proper cultivation of human resources also contributes to productivity by encouraging innovation.

Recommendation 1
Promote greater participation of women and the elderly in the labor force, and attract high-quality human resources from outside Japan.

Recommendation 2
Nurture new human resources capable of adapting to a changing environment, and foster an environment where young people feel motivated.

Recommendation 3
Encourage imagination and creativity in the classroom and drastically reform education through greater government support.

Incorporating the Dynamism of Asia

The negative impact of Japan’s population decrease will be enormous. This means that, in order to grow, the country must strive to not only dramatically increase its productivity, but also incorporate the dynamism of a growing Asian region. This second key task for Japan specifically involves attracting foreign capital to offset the decline in its own capital accumulation as a result of a graying population. In order to broaden demand, Japan also should press forward with participation in the Trans-Pacific Partnership and engage with its Asian neighbors in a way that drives its own domestic demand. This should all take place in tandem with a drive to push forward the frontiers for growth by capitalizing on Japan’s strengths.

Recommendation 4
Participate in the TPP trade agreement and draw on the growth in China and other emerging Asian countries.

Recommendation 5
Push forward the frontiers for growth by utilizing Japan’s strengths, such as its cutting-edge products.

Recommendation 6
Gradually resolve the post–March 11 energy restraints in a comprehensive and efficient manner.

Restoring Fiscal Health

The third key task for Japan is to swiftly restore fiscal health. This is necessary to avert the Pessimistic Scenario, where growth falls due to deteriorating public finances. More specifically, urgent measures must be taken to create a tax system that can be balanced with economic growth, establish a sustainable social security system, construct a social system that meets the needs of an aging society, and correct social disparities.

Recommendation 7
Adhere to government policy that raises the consumption tax and redistributes taxes through benefit schemes, rather than delaying the restoration of fiscal health.

Recommendation 8
Restore a sense of trust among young people and establish a social security system that is secure and sustainable.

Recommendation 9
Incorporate community-based reforms to realize a social system that caters to an aging population.

Recommendation 10
Reduce income disparity and address the issue of poverty through increased employment and income redistribution.

Recommendation 11
Rethink the division of roles between central government and regional governments, and reorganize the regional governments so that they become larger in size and more fiscally autonomous.

Enhancing Foreign Policy and National Security

The fourth and final task centers on enhancing foreign policy and national security. Japan needs to be more actively engaged in shaping the global order and promoting Asia-Pacific prosperity, with the Japan-US alliance as the cornerstone. By 2050, Japan will find itself sandwiched between two superpowers—the United States and China, each with a GDP six times that of Japan. In addition to ensuring its own security, through efforts undertaken on its own and with its allies, Japan will need to play an active role in promoting stability and prosperity in the Asia-Pacific region.

Recommendation 12
Contribute to global governance and help to maintain an open, rule-based international order.

Recommendation 13
Engage in regional governance to enhance Asia’s stability and prosperity.

Recommendation 14
Improve national governance through autonomous and collaborative efforts to enhance security.