Aging in Japan: Causes and Consequences. Part II: Economic Issues [Revised and updated August 2002]

Horlacher, D. (2001). Aging in Japan: Causes and Consequences. Part II: Economic Issues [Revised and updated August 2002]. IIASA Interim Report. IIASA, Laxenburg, Austria: IR-01-009

Preview

Text IR-01-009.pdf Download (421kB) | Preview

Abstract

This survey reviews current research on the impact of present demographic trends -- population aging combined with slower overall population growth -- on Japan's economic future. Among the conclusions which emerge are the following:

Japan has been successful in combining rapid economic growth with a high degree of economic equality. However as its population ages its income distribution will become more unequal. But this will be due to a greater weight given to the elderly where income is distributed most unequally. There is not likely to be any significant increase in inequality within age groups.

-- Much of the research reviewed here has to do with the relationship between population aging and household savings in Japan. This research has tended (some might say narrowly) to confirm the relevance of the life cycle hypothesis, leading to the conclusion that population aging will reduce the household saving rate. There is unanimity that population aging will negatively affect government balances through the rising system dependency rate of the public pension system and, less significantly, rising health care costs. Thus, all projection exercises studied here have concluded that projected demographic trends will reduce the aggregate saving rate.

-- Much less attention has been devoted to investment than to saving. All projection exercises reviewed here have concluded (or, perhaps more accurately, assumed) that the impact of demographic trends on investment will be less significant than their impact impact on saving, with the result that the current account surplus will diminish, eventually turning into a deficit.

The traditional Japanese labor market system of lifetime employment, seniority-based compensation, and mandatory retirement at an early age is already coming under pressure due to aging of the labor force. The opportunity costs of distortion and institutional factors that affect the labor supply of women will rise as labor becomes scarce.

Deceleration in the rate of labor force growth combined with diminishing returns to capital should be a powerful stimulus for intensified research and development activities in Japan. This activity should enable Japan to push back the frontier of industrial technology and achieve an acceleration in the rate of growth of labor and total factor productivity. That has not happened. In almost every sector and by almost every measure Japan's rate of productivity growth has been falling in recent decades.

Pension reform has the potential to defuse the macroeconmic impacts of population aging, however, given the fact that 70 percent of the income of the elderly comes from the public pension system, the distributional impacts are likely to be large. In the past four-fifths of public pensions are wage-indexed. At that time pension system contribution rates were essentially delinked from productivity growth under current arrangements. Another way of looking at this is that, as population aging and productivity gains raised wage rates, pensions rise "pari passu" and contribution rates must rise as well.

Actions (login required)

View Item