Defusing Japan’s Demographic Time Bomb

Japan is a hyper-aged society with a dwindling population. Indeed, this has been the case for several years now. The total population peaked around 2008, and in 2007 the proportion of the Japanese aged 65 or older topped 21%, the level at which a society qualifies as “hyper-aged.” Moreover, the rate of aging and depopulation is expected to pick up in the years ahead, according to the latest edition of Population Projections for Japan, released in January 2012 by the National Institute of Population and Social Security Research (IPSS). All of this suggests that Japanese society in 50 years will be in many ways fundamentally different from the society we have known to this point. In the following I hope to shed some light on how this society will look and function, and what we can do to cushion the shock.

Portrait of a Hyper-Aged Society

Discussions of Japan’s demographic problems often focus on the overall decline in population. But it is important to understand that Japan’s population structure 50 years down the road will not be simply a scaled-down version of today’s population pyramid.

Understanding Population Structure

The structural shift Japan is undergoing is indicated visually by the figure below, comparing the population pyramids for 1960, 2010, and 2060 (projected). If we compare the 2060 pyramid with that of 2010, we see that the former is not only smaller in total area, indicating a decline in overall population, but also substantially different in shape, revealing a major change in demographic structure. Of course, “pyramid” has already become a misnomer in Japan’s case, as is apparent from the 2010 chart; the prominent bulge in the middle-aged and older age groups creates a shape more closely resembling an urn. However, by 2060 it will be essentially an inverted pyramid. Incidentally, the high number of centenarians suggested by the 2060 chart is no graphing error. The number of Japanese citizens aged 100 or older grew from a mere 100 or so in 1960 to about 44,000 in 2010, and under the latest IPSS projection, it will reach 637,000 by 2060.(*1) In short, Japan is expected not only to lose population over the next few decades but also to undergo a profound change in population structure.

This series of charts is also useful for illustrating the ongoing impact of Japan’s postwar baby boom, which lasted from 1947 to 1949. In the 1960 chart, the baby-boomers have reached 11–13 years old, and their impact on the population pyramid can be seen in the pronounced bulge just beneath the 15-year mark on the age axis. By 2010, they are 61–63, creating a commensurate bulge at that age level, while their children create another bulge (the “second baby boom”) around the 40-year mark. This highlights an important truth about demographics, namely, the long-lasting repercussions of the birthrate at a particular point in time. In general, we can say that the population picture of the present and even that of the near future is constrained by events of the past. Indeed, the demographic shift we are highlighting here is a consequence of the long-term drop in the fertility rate during the decades following the 1947–49 baby boom, particularly from the mid-1970s on, when the total fertility rate fell below the replacement rate (the rate required to maintain a stable population). What this means is that, to a great extent, the hyper-aging and overall decline of Japan’s population over the next few decades is irrevocable and must be accepted as a given.

Structural Changes in the Overall Population

While population pyramids are a useful way to visualize shifts in the population structure, a somewhat more detailed analysis is needed to illuminate the issues Japanese society will face in the decades ahead and identify appropriate countermeasures. For this we will use the table below, a compilation of key demographic indicators, both past (1960 and 1985), present (2010) and future (2035 and 2060), drawn from the IPSS’s Population Projections for Japan and other government statistics. From these data we can identify five key trends.

Japan’s Population Age Structure, 1960–2060

Sources: Statistics Bureau (Ministry of Internal Affairs and Communications), Population Census of Japan; National Institute of Population and Social Security Research, Population Projections for Japan (January 2012), based on medium-variant fertility and mortality projections.

The first key trend is an overall decline in population. Between 2010 and 2060, the population of Japan is projected to drop from 128.06 million to 86.74 million—a decline of 41.32 million, or roughly one-third, in a period of 50 years. Furthermore, the population lost between 2035 and 2060 is expected to exceed that lost from 2010 to 2035, indicating an accelerating pace of decline. From 2040 on, the total population is projected to drop by more than 1 million annually—roughly the population of one of Japan’s smaller prefectures.

What accounts for such a precipitous drop? Put simply, it is the increase in the number of deaths as the population ages and the decline in the number of births. In 2040, for example, deaths are projected at 1.67 million and births at 670,000, yielding a net population loss of 1 million. Even though annual mortality is projected to peak around 2040 and fall to around 1.54 million by 2060, the total population will still decline by 1.06 million that year because the projected number of live births for 2060 is only 480,000.

The second trend is the increase in the elderly population and in the ratio of elderly persons to the total population. The number of elderly persons is projected to increase from 29.48 million in 2010 to 37.41 million in 2035. After peaking at around 38.78 million in 2042, the elderly population will begin to decline, but since the overall population is declining even faster, by 2060 the elderly will account for a full 39.9% of the population. In other words, one out of every four people in our society will be 65 or older. The number of elderly persons classified as “advanced age” is expected to increase at a particularly fast clip as the baby boomers pass the 75-year mark; between 2010 and 2035, this age group is expected to grow from 14.19 million to 22.78 million, an increase of about 60%. The aging of this cohort will also boost the number of annual deaths by 40% during this period, from 1.20 million to 1.66 million. A hyper-aged society is a high-mortality society.

The third trend to note is the decline in births and the dramatic drop in the population of young people. From 16.84 million in 2010, the population of children is projected to fall by about one-third, to 11.29 million, by 2035, and by a full half, to 7.91 million, by 2060.

An important point to keep in mind here is that the projected decline in births is not primarily the result of a further drop in the fertility rate. Indeed, the total fertility rates posited for the Population Projections for Japan—as compared to the 1.39 fertility rate in 2010—are 1.34 in 2035 and 1.35 in 2060 for the medium variant, and 1.59 in 2035 and 1.60 in 2060 for the high variant; in either case, the total number of births drops significantly.(*2) The sharp decline in births is an inevitable consequence of a decline in the number of women of child-bearing age as a result of the earlier drop in the fertility rate.

This is not to discourage public policy aimed at encouraging childbearing. The government has a duty to create a climate congenial to marriage, childbearing, and childrearing through family-friendly labor policies and measures to reduce unemployment among young adults. But we need to realize that, even if such policies are successful in pushing up the fertility rate, they will not reverse the decline in the total population and particularly the young population over the coming decades.

The fourth important trend is the rapid decline in the working population. This process began some time ago (Japan’s working-age population peaked at 87.17 million in 1995), but by 2060 the number of working-age people will drop to 44.18 million, roughly half the 2010 figure of 81.73 million. Unless the rate of participation in the labor force rises, this will mean a proportionate drop in the size of the labor force. The biggest problem here is that, under these population projections, the number of working-age people continues to decline at roughly the same rate from 2010 to 2035 (a loss of 18.3 million) and from 2035 to 2060 (19.25 million). Thus, even while the elderly population is mushrooming between 2010 and 2035, the working-age population that supports the elderly is dwindling sharply.

This brings us to the fifth trend, namely the rapid increase in the old-age dependency rate, (the ratio of the elderly to the working-age population), which we can restate as the number of productive individuals supporting each elderly person. In 1985, there were 7 working-age people for each dependent elderly person. By 2010, that number had dropped all the way to 2.8. Moreover, it is projected to fall even further: to 1.7 in 2035 and 1.3 in 2060.(*3)

To be sure, these calculations are based on age-group divisions that correspond imperfectly to the realities of Japanese society, given the high percentage of Japanese who continue their schooling through high school and college, and given the willingness of many Japanese over 65 to continue working. For this reason, the table here provides, for reference purposes, alternate projections that treat 20–69 as working age and 70 and up as elderly. In this case, the old-age dependency ratio rises at slightly slower pace, but the increase is dramatic nonetheless.

Regional Discrepancies and Changes in Household Structure

To formulate effective public policy to deal with a hyper-aged society, it is not sufficient to chart the changes in Japan’s overall population and demographic structure. Two other major factors come into play.

The first factor is regional discrepancies in the changing demographic age structure. Although aging and depopulation have frequently been spotlighted as issues affecting rural communities, the IPSS’s Population Projections by Prefecture (May 2007) predicts that the elderly population will increase at a greater rate in Japan’s large cities than elsewhere.(*4) The report projects a 75% or greater increase in the elderly population in Saitama, Chiba, Kanagawa, and Okinawa prefectures by 2035, and it projects an increase of at least 50% in Tokyo Metropolis and in Aichi and Shiga prefectures. With the exception of Okinawa, each of these prefectures is in one of Japan’s three major metropolitan areas (Tokyo, Kyoto-Osaka, and Nagoya). This dramatic increase in the elderly population in and around Japan’s big cities can be traced back to the mass urban migration that took place in the 1950s and 1960s. The young adults who abandoned the countryside for the city during the period of rapid economic growth are rapidly joining the ranks of the elderly.(*5) Of course, there is no question that depopulation is a serious problem for rural Japan, especially for settlements falling beneath the critical population threshold for viability. My intention here is simply to emphasize that the aging of the population in the major metropolitan areas is not an issue that can be put on the back burner.

The second factor to consider, especially with respect to health care and long-term care, is changes in household structure. The IPSS’s March 2008 Household Projections for Japan predicts a further decline in the number of three-generation households and a rapid increase in those consisting only of a married couple or of one person living alone. Particularly noteworthy is the rising number of households headed by persons 65 or older. The report projects an overall increase in such senior households from 13.55 million in 2005 to 19.03 million in 2030, with two-member senior households increasing from 4.65 million to 5.69 million, and single-member households almost doubling, from 3.87 million to 7.17 million. Even in the case of elderly people living alone, however, one must distinguish between those with children living nearby and those without, since this makes a critical difference in terms of the potential for family support and emergency assistance. In this connection, a particularly sobering figure is the projected increase in never-married elderly persons living alone—from 270,000 men and 530,000 women in 2005 to 1.68 million men and 1.20 million women in 2030. This is not an issue that can be addressed simply by assigning adult guardians to individuals with dementia. Japanese communities are facing the necessity of somehow replacing the functions traditionally performed by the family.

Coping with a Hyper-Aged, Dwindling Population

Since population is the most basic variable of social and economic activity, demographic aging and population loss of this magnitude are sure to have profound ramifications at many levels. In the following I briefly examine some of the policy implications in respect to politics, the economy, and social security.

Political Impact

In international terms, the most obvious political impact hyper-aging and loss of population is likely to have on a nation is an overall decline in national power.(*6) And because Japan’s population is projected to shrink at a rapid rate even while the world’s developing countries are growing, our national clout will diminish all the more in relative terms. In this context, it is worth noting that in 1950, Japan had the fifth-largest population of any country in the world. By 2010, its rank had fallen to tenth place, and by 2050 (according to a United Nations estimate) it is will drop to number 16. Of course, population is just one of several components of national power; economic strength also plays a key role. But since demographic aging and population loss have a negative impact on economic growth, as we shall see, a decline in national power seems all but inevitable.

Facing this prospect, some are likely to advocate opening the doors to more immigrants to replenish the population (so-called replacement migration). However, since immigration policy affects the character of a nation and society at the most basic level, such a fundamental change requires great caution. Japan is already dependent to a considerable degree on Japanese Brazilians and other immigrants for unskilled labor, and the experience of the Western industrial nations suggests that there are serious social drawbacks to mass immigration of unskilled, low-cost laborers. Our first priority should be boosting the labor force participation rate among Japanese citizens.

Having said that, I am certainly not proposing that Japan shut its doors to international society and attempt to go it alone. Japan needs to strengthen its economic and political partnerships with countries around the world, especially the nations of Southeast Asia. In addition, it should be clear that Japan must act decisively to improve its global public relations capacity and train people capable of functioning in international society, particularly given our meager participation in the administration of international organizations relative to other countries of comparable economic stature.

What about the impact of demographic aging and population decline on our domestic politics? One major concern is mounting intergenerational conflict over allocation of resources and burdens. The portion of the electorate occupied by the elderly is expected to rise from 28.0% in 2010 to 38.8% in 2035 and a full 45.8% in 2060; as senior citizens gain electoral clout, the government will find it increasingly difficult to adopt policies that work to their disadvantage. It will be more inclined than ever to “kick the can down the road” when it comes to such cost-saving measures as reducing benefits and raising medical copays. In a society with an ever-diminishing pool of human resources, the tendency will be, increasingly, to shift the burden to future generations. The only alternative is for current voters to recognize the urgency of the problem and realize that they have a responsibility to deal with the problem in their own lifetime.

One important component of the solution is reform of the electoral system.(*7) Under the current system of single-seat constituencies, adopted in 1994, general elections are focused excessively on local issues, and politicians concerned with the long-term welfare of the nation are at a disadvantage. We need to think seriously about a return to the system of multi-seat electoral districts. This is also important if we are to transcend the interregional conflicts that are sure to escalate as outlying communities seek measures to cope with the depopulation that threatens their economies and societies.

Economic Impact

The three basic sources of economic growth are capital accumulation, labor, and technological progress. Let us look at the impact of demographic aging and population decline on each of these factors.

As regards capital accumulation, the economy cannot grow unless people save and the savings are invested in things like new and better production facilities. The life-cycle model posits that people accumulate savings when young by putting away a portion of their income and then begin using those savings once they retire. This principle can be applied not only to individuals but—at least to some degree—to an entire society, which suggests that a decline in the working-age population will lead to a drop in the savings rate. Furthermore, if the shrinkage of the Japanese market as a result of population decline makes Japan a less attractive place for business investment than the more rapidly growing emerging economies, a vicious circle could ensue as the prospect of sluggish growth slows the flow of investment capital from overseas, resulting in yet slower growth.

Where labor is concerned, a 37.55 million drop in the working-age population between 2010 and 2060 is sure to cut into the labor force, since the latter is proportionate to the former. Tight labor supply will put upward pressure on wages, and as the gap between labor costs in Japan and other countries increases, more manufacturers are likely to move their production bases overseas, exacerbating the trend toward deindustrialization. In the labor-intensive health care and long-term care industries, where rising demand has a particularly strong job-creating effect, staff shortages could become ever more severe over the medium and long term.

Technological progress fuels economic growth by increasing productivity, but the effect of these demographic trends on technological progress is more difficult to predict. Some have suggested that the trend toward fewer children per family means more education spending per capita, which will increase the capital equipment ratio for human resources when it comes to technological development. Others have argued, to the contrary, that major technological advances are themselves a function of population; in other words, if the probability of making a major technological advance is constant, then such advances occur in proportion to the population.(*8) In addition, demographic aging could generally be expected to have a negative impact on the rate at which advances in technology—particularly information and communications technology—are adopted and put to use.

Some analysts contend that when assessing the impact of such demographic changes on the economy, we should focus primarily on per capita gross domestic product. The argument is that, while total output is bound to decline as the population dwindles, this tells us little about the impact on people’s lives; for that, a more appropriate yardstick is total output divided by the population. But this focus obscures two important factors. One is the macroeconomic benefits of scale. A decline in a country’s population means shrinking domestic markets, and this has a chilling effect on business activity and investment. The other is the impact of public debt, which in Japan’s case has reached about twice the nation’s GDP. The smaller the population, the larger the debt burden on each individual.

What can be done to mitigate the economic impact of hyper-aging and population decline? The two most important tasks are (1) boosting the labor force participation rate and (2) increasing productivity.

When it comes to increasing labor force participation, the key lies with women and those aged 60 and older, both underutilized resources in Japan. To encourage women to enter the labor force in greater numbers, we need to provide support for working mothers, including an adequate supply of day-care facilities, as well as a wider range of employment options and career opportunities. Likewise, we need to create an environment that encourages people aged 60 and older (including those over 65) to stay in the labor force as long as possible.

To increase productivity, education and training are of the essence. It is vital that we take measures to raise the quality of school education—at the primary and secondary as well as the university level—and to develop job skills through training programs inside and outside the workplace. The government can also promote higher productivity through deregulation and tax breaks to encourage technological development. From the standpoint of economic strategy, the government must avoid protectionist policies and allow the forces of international competition to promote a more efficient allocation of resources and strengthen Japanese industry as a whole.

Social Security

When it comes to the social security system, the impact of the changing population structure is felt both indirectly, through its effect on the economy, and directly. The most significant statistical trend in this connection is the steep rise in the old-age dependency ratio. This raises serious problems for Japan because our social security system relies so heavily on the economic output of those currently working to support the elderly who are not.

Pensions. The public pension system provides the clearest illustration of this problem. Japan’s public pensions are financed in a manner referred to as “pay-as-you-go,” which means that—simply put—benefits to today’s retirees are financed by current contributions from active members of the labor force. A rapid increase in the old-age dependency rate can threaten the financial sustainability of such a system, or at the very least raise serious issues of equity vis-à-vis the distribution of burdens and benefits. The Japanese pension system is also a social insurance scheme, in which each individual’s benefits are tied to his or her contributions. In the case of Employees’ Pension Insurance, premiums are split between the employee and the employer, and Japanese industry has complained for years that the burden of employer contributions is pushing up production costs and making Japanese businesses internationally uncompetitive.

In 2004, the government responded by revising the National Pension Law to limit cost-of-living benefit increases (using a formula that takes into account the decrease in the number of enrollees paying in and the increase in life expectancy), while setting upper limits on the contribution rate (for example, the maximum rate for Employees’ Pension Insurance will be 18.3% beginning in 2017).(*9) Despite these reforms, the public debate has continued, with particular focus on various proposals for a complete overhaul of the pension system.

The two fundamental changes most commonly advocated are a shift from a pay-as-you-go system to a funded system, and a shift from the social insurance model to a universal tax-funded program. Let us examine these one at a time.

The basic argument for shifting to a funded pension is that the current pay-as-you-go system creates intergenerational inequities. However, intergenerational equity is a complex issue that cannot be appropriately assessed or addressed within the confines of today’s pension system; for example, many of today’s elderly pensioners had to support their own parents single-handedly in the days before the public pension system was in place. Furthermore, the idea of a gigantic public pension fund raises the question of how to manage such a fund to protect it from inflation and ensure a minimum level of income in real terms—the whole raison d’être of a pension scheme. Shifting to a funded system also raises thorny transition issues: Would the initial cohort of working-age people have to bear the double burden of supporting the elderly population while simultaneously building their own retirement fund?

The other approach advocated is a shift from social insurance to a universal tax-funded program. One key problem with this proposal is that calling contributions taxes instead of premiums does not fundamentally lighten the burden or alter the distribution of contributions and benefits. Proponents of this reform argue that it would solve the problem of retirees who find themselves pension-less in old age because they failed to enroll or pay their premiums when younger. While shifting to a tax-funded system would eliminate that problem over the long term, in the short term it scarcely seems fair to offer equal treatment to those who avoided paying premiums and those who met their responsibilities over the years. For this reason, a shift from a social insurance scheme to a tax-funded program would require a complex, incremental transition during which both systems would temporarily exist side by side.

All of this brings us to two basic conclusions. First, reform of the pension system is a complex process, akin to solving simultaneous equations; simply resolving one aspect of the problem does not guarantee a solution to the whole. Second, because the pension system is a kind of long-term contract between the government and its citizens, any overhaul of the system becomes extremely difficult.

This is not to argue against any reforms or modifications in the public pension system. To the contrary, I would argue for strengthening the guarantee of a basic minimum pension, adjusting benefit levels, and extending taxation of benefits. The government also needs to look at raising the retirement age, currently 65. My fundamental view, however, is that rebuilding the public pension system from scratch is not a viable option. We need to work within the existing system, adopting whatever revisions or additions are needed to respond to demographic and economic trends in a manner that “shares the pain” equitably within and among generations.

Health care. The other major component of social security is the health care system. While the pension system is strictly a financial scheme for transferring income within and between generations, health care involves the delivery of services prior to financing (reimbursement, procurement). For this reason, demographic aging and population decline affect the health care system in more complex ways than they do the pension system. With space limitations in mind, I will limit my discussion here to four crucial points.(*10)

The first is the need to shift to a more holistic, patient-centered model of health care. Professional specialization is inevitable in health care given the rapid rate at which medical science progresses. But specialization also increases the need for comprehensive, holistic care. Moreover, this need only grows more acute as people age, since the elderly (and particularly those of very advanced age) are more apt to have multiple ailments or to experience the kind of physical or mental decline that calls for extended nursing care. This is why we need health care that treats the whole person—rather than each organ separately—with the aim of helping individuals function and live life with dignity from day to day. If we accept this as the basic purpose of health care, then its scope expands to include not merely nursing and elder care but also preventive measures to lengthen the average healthy lifespan and even housing and community-development policies to support independent living. The central point is that if health care is the application of medical science to our society, then surely the changes our society is undergoing necessitate a redefinition of the role and nature of medicine and health care.

The second point I wish to stress in relation to health care is the need to focus simultaneously on quality and efficiency. The aging of our population and the ongoing development of medical technology combine to create a situation in which rising health care costs are inevitable. If we focus narrowly on holding costs down, quality of care will necessarily suffer. At the same time, though, we cannot pretend that health care exists in a vacuum, independent from economic constraints. For that reason we must work to ensure that the system provides the best possible value for the money.

One key to improving both quality and efficiency is to promote differentiation of health care facilities by the level of care provided. This would address two conspicuous features of Japan’s current health care delivery system relative to other countries, namely, the large number of hospital beds and the low level of staffing per bed. Increasing the density of health care personnel is an urgent priority from the standpoint of improving the quality of health care in Japan. However, as health care facilities specialize by function and level of care, this increases the need for cooperation and coordination. The government has taken positive steps to encourage home health care, but such a policy is only realistic if we define home health care broadly, as care provided not only in traditional homes but also in geriatric health service facilities, special nursing homes, group homes, assisted-living facilities, and other communal facilities and residential arrangements for the elderly. This is a matter of particular urgency in Japan’s major metropolitan areas, where the population is aging so rapidly.

The third point to be emphasized is the pressing need for measures to secure adequate health care personnel amid a dwindling labor force. This is a question not merely of quantity but of quality as well, particularly given the increasingly sophisticated and complex nature of health care today. Moreover, since other industries are also looking to recruit the best and brightest, competition over the shrinking pool of human resources, particularly young workers, is likely to be fierce. This makes it essential for Japan to improve labor productivity in the health care system by developing advanced professional skills while encouraging a more efficient division of labor. Part of the reason Japan’s doctors and nurses are overworked is that they are obliged to perform duties that could easily be carried out by less highly trained personnel. If doctors would delegate such work to nurses, nurses to nursing aides, and so forth, health professionals would be able to focus on the work appropriate to their level of training. This would contribute simultaneously to greater efficiency and to a higher level of professional competence overall.

Fourth, we must address the issue of generational equity in the distribution of the health care burden. In fiscal 2009, people 65 and older constituted 20% of the population, yet they accounted for more than half of the nation’s health care costs (55.4%). Furthermore, those 75 and older, who constituted just over 10% of the population, accounted for more than one-third (32.6%) of costs. Yet the rate of copayment for medical treatment is significantly lower for the elderly than for those still paying into the system. Of course, it is inevitable that the frequency of medical consultation and treatment will mount as a person grows older, but as the population continues to age over the coming years, the disproportionate burden on younger people, who receive relatively few benefits, could become a source of serious generational conflict. In addition to measures to hold down overall costs by improving the efficiency of health care delivery and using preventive measures to lengthen the average healthy lifespan, the government must consider raising the copayment rate for the elderly to address this imbalance.(*11)

A Call to Action

In concluding, I would like to highlight three basic truths that argue for prompt and serious action to address the problems outlined above.

First, one of the frightening things about demographic crises is that by the time people see them coming, there is little they can do to prevent them. As we have seen, the hyper-aging and depopulation trends projected for Japan over the next 50 years must be regarded, to a large extent, as a given. But the fact that these trends cannot be reversed midstream makes it all the more important that we visualize and prepare ourselves for the results. This includes adopting policies to mitigate the impact of demographic aging and depopulation by extending the healthy lifespan of the aged and boosting the participation of women and the elderly in the labor force.

Second, a hyper-aged society is something no country anywhere has ever experienced before. To those who argue for a more complacent outlook, I would urge humility in the face of a phenomenon with which we have no prior experience. We cannot predict the future with absolute certainty, but for that very reason we need to act now so as to be prepared for the worst. To procrastinate would be to shirk our responsibility to future generations.

Finally, let us remember that the world is watching closely to see how we respond to the challenge of hyper-aging and demographic decline, a phenomenon by no means unique to Japan. Fertility has fallen below the replacement rate in several East Asian and Southeast Asian nations; indeed, the birthrate in Taiwan, South Korea, and Singapore is now even lower than that in Japan. Meanwhile, hyper-aging is a problem that the entire industrial world must confront sooner or later. In applying our resources to meet this challenge in an effective and appropriate manner, Japan will be making a valuable international contribution by providing a model for the rest of the world to follow.

(Originally written in Japanese.)