How does economics work on a shrinking population in Japan?

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Bank of Japan may cut its growth forecast for this fiscal year to see the result of GDP growth in Q2 after an increase of consumption tax in Japan, according to Bloomberg on 15 Aug 2014.   Is it too early to increase taxes? Or is it inevitable to decrease the fiscal deficit?  Let me consider a little bit here because this is very important not only for Japanese people, but also other aging societies which follow Japan.

 

Fundamental problem in Japan, I think, is shrinking populations. The population of Japan is decreasing at a rapid pace.  More than 200,000 populations are lost in Japan every year. It must be very sad that if we can see a 200,000-living city is disappearing from our sight every year.  Although it is almost impossible to see what happens in the population every day,  I am sure it is not good for economic growth, investment strategy. The richer countries are, the more population they can sustain in them.  Therefore, economics implicitly assume populations in countries are not decreasing at least unless there are disasters or epidemic. Unfortunately, it is not the case in Japan.  The population has been shrinking even though it is the third biggest economy in the world.

 

Aggregate demand

Shrinking population has a negative impact against aggregate demand as fewer people buy goods and services. Therefore tax increase may discourage consumer confidence more than in a normal economy in which populations are increasing. In addition to that older people consume fewer goods and services than younger people do.  There will be no need for new shopping malls, convenience stores, gasoline stands, schools and kindergartens anymore in such situations. Even thought we would need new hospitals to take care older people and funeral ceremony services when they pass away,  I do not think these services can compensate lost demands due to shrinking populations.

 

Export

How about exports to grow GDP?  When JPY is weakening, exports used to be picked up.  The current situation,  however, a little different.  Since the big earthquake hit Japan in March 2011,  trend of trade balance has been negative, even though JPY has been weakening.  One of the reasons is the importing energy to replace nuclear power plants.  Another is that Japanese consumer goods are less competitive than they were in 2000s.  So Japan cannot rely on exports to offset shrinking domestic demand.  What should we do? 

 

Human capital

One way to revive the Japanese economy is that bringing up high profit and productive industries.  The key is human capital in Japan to achieve that. When we focus on how older people should be cared after their retirement, however, people tend to forget how we should bring up younger people , who are the next generation of workforces. This is a kind of problem about optimization of our society.  How we should allocate our resources between older people and younger people.  Which should come first, schools or hospitals?  In terms of education in Japan,  I am not so confident to say that the Japanese education system enables its children to compete global competition to obtain skilled jobs. English, math and programming will be critical to raise employability in the future, however, it seems there is no change in the Japanese educational system to teach them effectively.  In the long run, I am afraid Japan can not raise productivity because its workforce lack fundamental skills.

 

Immigration

People who have never been to Japan, may not understand why Japan does not have immigrations from overseas to compensate shrinking populations.  In my view, Japan is not ready to have immigrations from overseas as it is culturally homogeneous.  People share the same language and the same experience.  It enables them to do “non-verbal communication” which is difficult to understand from the standpoint of foreign people. This is an obstacle to live with foreigners.  It takes longer time for Japan to accept immigrations as few people has experience of “living with foreigners”.

 

 

I must say there is no easy way out of this difficult situation.  Although tax increase from 8% to 10% is needed to decrease the fiscal deficit of Japan, it is very difficult to keep the best timing for the Japanese government to introduce it.  Japan has only limited time to make its fiscal balance to be sustainable.

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