The real threat to Japan’s economy might not be deflation

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By Jacob Maslow

japan crane industrial lot
HAKONE, JAPAN – DECEMBER 3, 2014: A crane at an industrial lot loads mobile generators for local use and for export. Small and medium industry make a substantial contribution to the economy of Japan.

Japanese Prime Minister Shinzo Abe is one brave man trying to reverse a  decades old economic slump that’s gripped Japan. Everything from near zero interest rates to all sorts of stimulus haven’t fixed the deflationary gremlins bedeviling the economy of the Land of the Rising Sun. As seemingly formidable as Shinzo Abe’s quantitative easing (reverse engineered from the US Federal Reserve), low interest rates, and structural reforms, this troika of economic medicine might not do much to deal with the 800 pound gorilla in the room. The real threat to Japan, both economically and existentially, is its population-Japanese are just having less and less children.

As the old saying goes, demographics is destiny. In Japan’s case, its decreasing birth rate throws Japan’s future as a country very much in doubt. The median age in Japan is 46 years old. The birth rate in Japan is at an alarming 1.41 children per woman-well below the 2.2 replacement level. Add to this the fact that Japan isn’t politically comfortable with immigration and you have the very stark possibility that Japan will shrink. Indeed, Japan’s annual birth rate numbers plunged to a paltry 1 million births. Based on these facts, Japan’s population is projected to shrink to 90 million in 2100 compared to the 126 million it had in 2010. In 2100, if current demographic trends persist, over 20% of all Japanese will be aged 70 and above. This is a demographic time bomb that will strain the country’s social security and welfare infrastructure precisely at the time when there is not enough young people to keep such a system afloat.
In terms of economic impact, declining populations redirects government resources from expanding the economy to taking care of a large senior population. It also increases the possibility of taxing working age populations even more to keep the system going. Moreover, with less qualified workers, companies may be forced to either automate, move overseas, or stay static. Regardless of how you cut it, Japan needs to get a move on regarding this demographic time bomb-before it’s too late.
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