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Japan’s point of no return

With the heroics of July’s FIFA World Cup rapidly fading attention will soon turn towards Japan, host of the 2019 Rugby World Cup and then the 2020 Summer Olympics. 

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Photo credit: Jun Sawa www.junsawa.com.au

Beyond the sporting arena our focus should also be on Japan for more fundamental reasons. The country has laid out a roadmap for dealing with an ageing population which a growing list of other countries will increasingly have an interest in.

"We all have a stake in Japan’s demographic alchemy succeeding.”

We all have a stake in Japan’s demographic alchemy succeeding. 

The third arrow

Japan’s population began falling in 2010. The country is already in possession of the world’s most-aged society, with 27 per cent of the population over 65. Projections suggest the population will decline from 127 million today to below 88 million by 2066 - and around 50 million in 2115. That is about where it was a century earlier. 

Significantly, the International Monetary Fund (IMF) has identified 2018 as a new point of no return for Japan’s demographics. This year, the second generation of Japanese baby boomer women are passing their reproductive age. The demographic challenges are enormous.

Japan’s ageing dilemma has been elevated to the highest priority in the slow moving structural reforms of Prime Minister Shinzo Abe’s eponymous Abenomics national renaissance program.

This ‘third arrow’ aims to transform not just the economic policy approach to a shrinking population, but the thinking which underlies it by merging cyberspace and physical space.

The two main programmes in the ‘third arrow’ are:

  • ’Society 5.0’

A holistic policy which aims to extend the digitally disruptive fourth industrial revolution into all areas of society to improve ageing and environmental sustainability and develop new, artificially intelligent, data-driven approaches to healthcare, transport and finance.

  • Human resources development revolution

Focussed squarely on labour market reforms, the HRDR aims to make childcare, tertiary education and flexible employment more accessible in order to keep more women and older people in the workforce and boost productivity.

Kaizen revival

Some analysts have lamented the lack of hard economics underlying these policies but Abe sees them as critical components of future growth. It must be said conventional economics has done a poor job of anticipating and responding to the challenges of the post-financial crisis world.

Weaker trend gross-domestic product growth, scant wage increases and challenges to industrial legacy are issues which conventional approaches are struggling to cope with.

Behind the political rhetoric is a subtle but noticeable shift in thinking about Japan’s ability to revive its industrial culture of continuous improvement, or kaizen, to end the negative mindset about population decline.

The Tokyo Foundation for Policy Research has found Japan’s strongest periods of economic growth are more correlated with productivity increases than increases in either the population or labour force participation.

Suggesting an economy with a declining workforce could turn to technology investment to maintain productivity, the Bank of Japan has argued industries facing the biggest shortfall of workers were most actively investing in labour saving information technologies

Digital society

Japanese optimism aside, there are serious questions as to whether Abe’s policies and vision for a new society can indeed deliver sustained economic growth despite a declining population.

At its heart, the HRDR is a conventional public spending initiative, funded by a long-debated consumption tax increase, designed to head off the rise in the dependency ratio in line with the IMF warning the window for such interventionist action is closing.

In contrast, Society 5.0 actively challenges the conventional wisdom an ageing demographic profile with a rising dependency ratio leads to secular stagnation.

Instead it presupposes the impact of demographic decline can be offset through the application of advanced technology like artificial intelligence, the Internet of Things and big data across all areas of society, including healthcare, mobility, housing and resources.

It is banking on the country’s technology strengths and on the assumption AI will support rather than displace human workers, meaning Japan will not face the structural adjustment challenges countries with younger populations may.

In this respect Japan is in quite a unique position. It may be the only major economy which doesn’t fear the rise of technology - and in fact it welcomes it.

There are still questions on how these new programmes will be implemented. The Abenomics renaissance has so far been excessively dependent on the Bank of Japan’s extraordinary monetary stimulus policy, which is now running into limits, whereas the new policies will require much greater coordination across government and industry.

Participation

Japan has demonstrated a surprising new openness to the forces of globalisation. Consider Japan’s increased pragmatism towards foreign nationals with the number of foreign workers almost doubling between 2012 and 2017, its booming and efficient inbound tourism industry and its leadership of a revamped Trans-Pacific Partnership trade deal.

Japan has also proved it can change traditional workplace gender imbalances, increasing its prime-age female labour force participation rate from 66.5 per cent in 2000 to 77.5 per cent in 2017. On this issue Japan has now overtaken the US.

The combination of a reinvigorated culture of industrial excellence with the looming power of artificial intelligence, may be giving Japan the opportunity to develop a new roadmap for dealing with the economic impact of ageing.

With most western countries and many emerging markets beginning to face similar issues, many have a stake in Japan’s success.

Richard Yetsenga is chief economist at ANZ

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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