Japan's Population Dilemma

For the better part of three decades, since its once-booming economy slipped into a semi-permanent funk, Japan has served as a cautionary tale for other developed economies. Many view it as a country beset by stagnation, population decline, and diminished clout. But not everyone is so hopeless. Take Jesper Koll, a German economist who has lived in Japan since 1986 and has emerged as one of the world’s great optimists about his adopted country.

"Japan is the only advanced economy where we’re seeing the rise of a new middle class and the only one in which the current generation of young people, those in high school and college, will be better off than their parents," he said.

In contrast to the United States, where members of the millennial generation face crushing levels of student debt, job insecurity, and inhospitable real estate markets, Koll believes that Japan is a country in which it’s comparatively easy to get ahead. "I wish I could be reincarnated as a 23-year-old Japanese woman," he said.

Economic data back this view — to a point. According to Japan’s Ministry of Health, Education, and Welfare, Japanese graduates enter a workforce in which there are 1.64 openings for every job-seeker, the highest figure since 1974. Unemployment, at 2.3 percent, is even lower than in the United States, while the labor force participation rate, at 77 percent, is six percentage points higher. Japan has achieved this while maintaining world-class standards in education and public health.

Japan’s success in this arena can be traced, paradoxically, to a factor typically associated with decay: the country’s declining population. After peaking at 127.8 million in 2004, Japan’s population has fallen by 1.5 million since then and is projected to drop even further. By 2065, when today’s high schoolers are approaching retirement age, Japan's population is expected to sink to 88 million. Because the number of Japanese workers exiting the labor force greatly exceeds the number of those entering it, virtually anyone who wants a job can get one.

Can this vision of Japan as a young worker’s paradise last? Probably not.

The combination of one of the world's lowest birth rates and the world’s highest life expectancy means that an alarming portion of Japan’s population is old. In spite of the government providing families with economic incentives to have more children, Japan’s birth rate in 2018 fell for the 37th consecutive year to a mere 1.45 children per mother. More than 28 percent of the population is over the age of 65 compared with just 15 percent in the United States. (Perhaps unsurprisingly, adult diapers now outsell ones for babies). A smaller workforce might make it easier for individual Japanese graduates to land a good job, but dim prospects for long-term growth have made employers reluctant to invest too much in labor, leaving many workers stuck in less than satisfactory arrangements. (While the labor shortage in 2017 finally reversed a long-term trend in which temporary jobs were replacing permanent ones, progress has been slow.). And with an increasingly small pool of people tasked with providing for a large and growing population of elderly people — Japan faces a mathematical problem that is only going to get harder to solve.

"It’s a complicated interaction," said Kristi Govella, assistant professor of Asian Studies at the University of Hawaii Manoa. "Individuals better able to get a good job right out of college will have a higher sense of satisfaction and think things are better, but at some point, the macro will interact with the micro and the whole economy will stop moving forward and perhaps their companies will begin laying people off. In the short term, I can see it resulting in people thinking, 'Hey, this is pretty good!' But I don’t know how sustainable it is."

In order to address problems attendant with population decline, Japan, a country known for its homogeneity, has increasingly turned to the non-Japanese. The number of foreign workers (pointedly not "immigrants") has doubled in the last five years. And in December, the government passed a new law opening the door to 345,000 more over the next five years in order to staff positions in industries like construction and elderly care where labor shortages are most acute.

Even still, the new law has attracted significant political opposition, underscoring the sensitivity of the subject in Japanese society. Avoiding immigration is one factor that has protected Japan from fissures roiling other parts of the developed world — such as the rise of extremist parties in Europe, Brexit, and the shocking election of Donald Trump — that reflect great societal cleavages. "How do you maintain your cultural identity and stability while still having a sense of duty and responsibility to the rest of the world?" Devin Stewart, a Japan expert at the Carnegie Council for Ethics in International Affairs, said. "President Trump’s wall is a symbolic version of this right now — a manifestation of the anxieties of and displacement from globalization. And Japan's answer to that has been to shield itself from those things."

Fear of disruption is one reason that Japan’s approach to immigration has been so tentative. Unlike Germany, the country has shown no inclination to accept large numbers of refugees or unskilled immigrants arriving from poorer nations on its periphery — but has made it easier for white-collar foreign workers to obtain visa renewals. (Then there’s the question of whether large numbers of immigrants even want to come to Japan: According to the IMD World Talent Rankings, the country in 2017 ranked last in Asia in its attraction to highly skilled foreign labor, a result Bloomberg View columnist Noah Smith argues has to do with its difficult language and infamously long working hours.)

But how much does Japan's ability to manage its future depend on factors beyond its control? A trade war between China and the United States — by far its two largest trading partners — could cause profound damage to Japan's economy, fostering the sort of economic insecurity that could foment political instability. Other countries share Japan's problems. Virtually every economy in the Asia Pacific is vulnerable to a U.S.-China trade war, while China itself — a middle-income country — faces a similarly aging population. But it’s difficult to escape the sense that Japan's aging, declining population presents an idiosyncratic set of challenges that will be difficult to manage in the decades ahead.

"A large number of old people have pensions that have to be paid and health care that needs to be covered, but Japan has fewer workers to provide the resources needed," said Tobias Harris, a Japan expert at the Sasakawa Peace Foundation. "Fewer people mean fewer consumers, fewer families having kids and those families spending less money on kids. To keep the same standard of living, each worker will have to produce more per hour, which means changes to the labor system and to the government. Then there’s the population as a source of national power. A country with more people carries more weight and living in a region where you have two countries with populations over a billion people — notwithstanding China’s demographic outlook — there’s a real concern with fewer Japanese, Japan will carry less weight and will just be a smaller voice in the region."

In a nod to Koll, there are far worse places to be a 23-year-old woman. But will Japan's future be as rosy when she's 43?