Japan shows how to grow sustainability amid a shrinking population

By Leith van Onselen

For more than a decade, the Productivity Commission has debunked the common myth that immigration can overcome population ageing. For example:

• PC (2005): “Despite popular thinking to the contrary, immigration policy is also not a feasible countermeasure [to an ageing population]. It affects population numbers more than the age structure”.
• PC (2010): “Realistic changes in migration levels also make little difference to the age structure of the population in the future, with any effect being temporary“…
• PC (2011): “…substantial increases in the level of net overseas migration would have only modest effects on population ageing and the impacts would be temporary, since immigrants themselves age… It follows that, rather than seeking to mitigate the ageing of the population, policy should seek to influence the potential economic and other impacts”…
• PC (2016): “[Immigration] delays rather than eliminates population ageing. In the long term, underlying trends in life expectancy mean that permanent immigrants (as they age) will themselves add to the proportion of the population aged 65 and over”.

In a nutshell, trying to overcome an ageing population through higher immigration is a Ponzi scheme. It requires ever more immigration, with the associated negative impacts on economic and social infrastructure, congestion, housing affordability, and the environment.

The obvious question that follows is, if immigration is not the solution to the ‘problem’ of population ageing, then what is? Enter Japan, whose population is both shrinking and ageing quickly:

And whose labour market is tight, with Japan’s unemployment rate recently hitting a 22-year low of just 2.8% (if only Australia was so lucky!):

Rather than open the immigration spigots for a short-term fix, and in the process crush-load infrastructure and housing, Japan has instead taken the high tech route of engaging in automation.

After spending a decade worrying about the rise of Japan, economists (and population boosters) in Australia now often label Japan an ‘economic basket case’ due to its ageing population. But the facts do not back this assertion up. In addition to having an unemployment rate that Australian workers could only dream of, as well as a relatively affordable housing market, Japan’s GDP growth in per capita terms has been highly respectable, as it has been for most other nations with declining populations:

These facts have not been lost on Project Syndicate, which has penned the following rebuke to the clam that Japan is facing a ‘dismal’ future due to population ageing:

Contrary to popular belief, Japan has been extraordinarily successful in achieving economic growth, given its rapidly aging population and lack of inflation…

Demography is not destiny, at least not entirely… Yet demographic factors are often neglected in economic reporting, leading to significant distortions in assessments of countries’ performance. Nowhere is this more apparent than in Japan.

With real output – the key measure of economic performance – having risen by only about 15% since 2000, or less than 1% per year, Japan easily seems the least dynamic of the worlds’ major economies. But given Japan’s demographics – the country’s working-age population has been shrinking by almost 1% per year since the start of this century – this result is remarkable.

In fact, Japan’s growth rate per working-age person was close to 2% – much higher than in the US or in Europe. Though the US economy grew more than 35% since 2000, its working-age population also grew markedly, leaving the annual growth rate per working-age person at only about 1%.

That indicator – growth rate per working-age person – is not widely used by economists, who instead focus on GDP per capita. By that measure, Japan is doing about as well as Europe and the US. But, while per capita indicators are useful for assessing a country’s consumption potential, they do not provide an adequate picture of growth potential, because they include the elderly and the young, who do not contribute to production. Even in Japan, with its high life expectancy, those over the age of 70 do not contribute much to output.

So, given its rapidly declining potential, Japan has been extraordinarily successful. A key reason is that it has put a growing proportion of its working-age population to work: unemployment is today at a record low of less than 3%, and almost 80% of those who could work have a job, compared to about 70% for Europe and the US.

Japan’s achievement of full employment and high job growth over the last two decades is all the more noteworthy in view of near-permanent deflation during this period (most prices are still lower today than they were 15-20 years ago). This should give food for thought to those who maintain that deflation imposes unbearable economic costs…

Another lesson from Japan is that a country with a large savings surplus can handle a large public debt, because it can be financed internally…

There are broader reasons why Japan’s economy is performing well on a per capita basis.

First, while Australia has built houses and imported migrants to live in them, Japan has built an extensive infrastructure system with world-class trains, roads, tunnels, bridges and internet – all of which has raised the living standards (and productivity) of the incumbent population.

Second, while much of this infrastructure has been financed by government debt, the bulk of Japanese debt is contained inside Japan, financed by Japanese investors, banks, pension funds, and the central bank, rather than via borrowings from the rest of the world.

Third, Japan’s external position with the rest of the world is unambiguously healthy. It is the world’s largest creditor nation thanks to the persistent current account surpluses accumulated over decades arising largely from its strong manufacturing exports:

Japan has the third largest car industry, the largest electronic goods industry, and is ranked among the most innovative in the world by global patent filings.

Fourth, japan is a well functioning society with few beggars and homeless people.

Overall, for a small island nation with limited natural resources, Japan is killing it economically, embracing smart productivity-enhancing growth over dumb ponzi-driven growth. To cash-strapped Western nations, Japan should be viewed as an economic role model, not a failure.

We also shouldn’t forget that economists at MIT recently found that there is absolutely no relationship between population ageing and economic decline. To the contrary, population aging seems to have been associated with improvements in GDP per capita, thanks to increased automation:

If anything, countries experiencing more rapid aging have grown more in recent decades… we show that since the early 1990s or 2000s, the periods commonly viewed as the beginning of the adverse effects of aging in much of the advanced world, there is no negative association between aging and lower GDP per capita… on the contrary, the relationship is significantly positive in many specifications.

If Australia was truly a ‘clever’ country like Japan, it would manage population ageing by: 1) better utilising existing workers, given there is significant spare capacity in the labour market; and 2) where required resort to technological solutions.

The last thing that Australia should be doing is running a mass immigration program which, as noted many times by the PC, cannot provide a long-term solution to ageing, lowers wages, and places increasing strains on infrastructure, housing, the natural environment, and overall living standards.

[email protected]