Japan’s ageing and dwindling population presents major economic challenges, IMF warns

11 Feb 20

Japan’s population is ageing and shrinking so quickly that there will be almost one elderly person for each working-age person by 2060, an assessment by the International Monetary Fund has found.

During the same time the population, which is currently 127 million, will shrink by more than a quarter.

Japan is at the extreme end of global demographic change, and this is bringing economic challenges that are only set to become more difficult, according to the assessment released by the IMF yesterday.

Although economic growth in 2020 is expected to remain stable at 0.7%, fund staff have estimated that over the next 40 years growth will be hit by an average of 0.8 percentage points each year due to demographics alone.

Public finances in the world’s third biggest economy will be hit hard: age-related spending such as healthcare and pensions will rise, while the tax base will shrink.

In the private sector, increased savings (as people gear up for retirement) ahead of investments can lead to low interest rates. The rapidly declining population is already leading to empty homes and a weakening housing market.

The IMF has argued Japan needs to adapt its policies to meet these challenges, particularly by enacting labour market reforms.

These should include increasing training and career opportunities for those workers without ‘lifetime employment’ – this is Japanese system whereby graduates are hired by firms and are guaranteed job security until retirement.

Workers without lifetime employment are mostly women, and supporting them to increase their prospects would help raise labour productivity and wages, boosting the economy and the government’s tax receipts.

Increasing the number of people in work by targeting more women, older people and foreign workers would also help, the IMF said, suggesting the government should increase childcare availability and abolish businesses’ right to set mandatory retirement ages.

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