Land of the Setting Sun: Japan’s Time Bomb

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Japan, the third largest economy in the world, is experiencing dramatic and potentially disastrous demographic shifts. Japan’s population, already old, is aging rapidly.

But in recent years, Japan has begun facing another demographic challenge: In addition to aging, the country’s total population has now begun shrinking. As a result of this overall decline, the senior share of the population is growing even more quickly. While the senior population continues to grow, the population of children and working-age adults is dropping.

These demographic shifts will pose both economic and social challenges to Japan. Depopulation and aging will transform family life, working conditions, social life, national economic growth, and possibly even foreign relations.1 Some worry, for instance, that the diminishing numbers of young adults and the attrition of its cities’ populations may sap the country of its capacity for innovation and economic growth.

In undergoing this change, Japan may be serving as the world’s test case. The way Japan adapts to and copes with its aging, shrinking population may offer lessons to other nations that will face similar demographic challenges later in the century. Japan’s successes and failures in meeting the twin challenges of depopulation and rapid aging could thus serve as examples for the rest of the aging world.

3 KEY FINDINGS

  • Japan’s population is projected to plunge more than 15% by 2040.
  • Japan’s population is also aging rapidly, with a median age projected to pass 50 by 2025 and 55 by 2040.
  • To deal with its shrinking and aging population, Japan is considering everything from raising the retirement age and cutting benefits to increasing immigration, adding women to the workforce, and using robots as caregivers.

3 of JAPAN’S DEMOGRAPHIC PROBLEMS

Japan’s demographic problems have already begun. The overall population peaked in 2008 and has steadily declined every year since then. And although its population continues to age rapidly, Japan already has the oldest population in the world.

These are some of the demographic factors that will challenge Japan in coming decades:

  • Large but declining population. Japan in 2014 has a population of 127 million, making it the 11th most populous country in the world. Yet since its peak in 2008, the country’s population has declined by a total of more than 1 million. In 2013 alone, its population fell by 244,000 people—the largest single-year decline in Japan’s history. With continued decline, the country’s population is projected to fall to 106 million in 2040 (making it just the 15th most populous country), and to
    87 million by 2060. And an alarming 2012 report by the Japanese government projected that, without policy changes, its population could sink to under 43 million by 2110. (Taking trends beyond reality, the report noted that they would lead to just 500 people inhabiting the country by the year 3000.)
  • Youth population declining sharply. The population of children and non-senior adults is dropping even faster than the decline of the overall population. The number of Japanese between the ages of 15 and 64 has fallen by nearly 4 million since 2008.
  • Shrinking labor force. Japan’s working-age population (15- to 64-year-olds) peaked in 1995 and plunged below 80 million in 2014—its smallest potential labor force since the early 1980s. Yet it continues to fall. By 2040, this cohort is projected to number just 57 million—nearly 30% smaller. The number of Japanese of working age for every person over 65—which had already dropped from 11 in 1960 to just 2.3 in 2014—is expected to continue sinking to 1.9 by 2025, and to 1.3 in 2040.

3 BUSINESS IMPLICATIONS

  • Aging Western nations—as well as such aging Asian countries as China—will be looking to Japan to see what helps (and doesn’t help) to ease the burden of a shrinking and aging population. In observing how Japan handles these challenges, many will be seeking clues to their own future. The Japanese experience may provide templates and models for ways to respond.
  • As the labor force shrinks dramatically, competition in Japan for labor, human capital, and talent will get much tougher. Talented young professionals and businesspeople will increasingly have their pick of jobs in the Japanese job market.
  • At the same time, the most talented and ambitious may pursue emigration, broadening the playing field in order to seek richer opportunities elsewhere. For this reason, Japan may become an abundant source of talent for foreign companies looking to attract Japan’s best and brightest to join their firms.