Table Speech

“How to Respond to the Era of Declining and Aging Population?”

June 1, 2011

Mr. Akihiko Matsutani
National Graduate Institute for
Policy Studies

 We have all taken for granted that population increases, so does the economic growth rate. Yet the Japanese population peaked in 2004 and began declining in 2005. What is more, Japan is the world’s fastest aging country. Aging problem is common to all advanced nations, but the twofold factor of declining and aging population in Japan is a unique phenomenon. What is the future scenario and required measures to be taken? My speech will focus on the reconstruction and rehabilitation in Tohoku after the East Japan Great Earthquake, the most pressing issue we are facing today.

 History proves that major catastrophe could turn the fate of a prospering country. The 1755 earthquake that hit Lisbon caused Portugal to decline. Likewise, the powerful earthquake in Argentina caused the fall of the country. I sincerely hope Japan will not follow the same path, yet I am worried that the reconstruction plans for Tohoku are just aspirations rather than specific plans.

 The economy will continue to play a significant role in the future of Japan. Figures on average economic growth rate per decade prove that Japan enjoyed an overwhelming growth of +4% in the 1980s. Its rate dropped to +1% in the 1990s, followed by +1.3% in the 2000s. The figure is forecasted to come out even in the 2010s. Population decline was not the direct cause of this economic stagnation during the first decade of the 21st century. A bigger structural problem was the declining technological development capacity in Japan, especially its product development capabilities.

 Now, what will be the possible future scenario? Natural rate of growth is forecasted to mark 0% in the 2010s, which will plunge to sub-zero figures of -0.3% in the 2020s and -0.8% in the 2030s. The ever expanding Japanese economy is likely to mark negative growth from now on, due to diminishing workforce. Number of productive population (15 years ‐ 64 years old) in Japan fell into negative territory in 1996, and has been decreasing at faster pace. In light of such accelerated decrease, some argue the necessity of utilizing foreign workforce. Our estimation proves that as many as 16.5 million foreign workers will be needed in the coming 40 years, in order to raise the economic growth rate to 0% by 2050. This figure implies that foreign nationals would account for an extraordinary 18.2% of the Japanese total population in 2050.
 Germany relied on foreign workforce in the past. Scores of Turkish and Czech workers supported Germany to achieve its high growth. Yet, its downside was that foreign workforce made German workers suffer from unemployment, which led to social unrest. What was more, social security expenses ballooned as low-wage earners increased rapidly, which eventually triggered financial collapse. Considering the fact that foreign workers accounted for only 8.5% of the German total population, we realize how unrealistic the figure 18.2% is. We must accept and prepare for the reality that the Japanese economy will head towards negative territory sometime during this decade.

 As we embark on the medium- to long-term reconstruction and rehabilitation of Tohoku in such economic setting, we must be ready to make steady and painstaking efforts over a long period. Reconstruction programs must stimulate the Tohoku area to recover its economic vitality and encourage them to make self-help efforts towards recovery, rather than providing all-out support.

 The disastrous earthquake in Tohoku gave rise to heated debate on tax increases. I must say that this is a wrong political choice, considering the future of Japan.

 Government spending per capita has been expanding tenfold over the past 50 years. Yet, the combination of declining and aging population will reduce the number and proportion of working people within the total population. Declining workforce will seriously reduce tax revenues with inescapable implications for public expenditure, which could compel the government to opt for tax increase.

 We must question the legitimacy of this tax increase policy. At times when Japan enjoyed high growth with rising populations, tax increases were an appropriate measure to balance out the budget. Times have changed. If we try to secure tax revenue to improve the budget balance, based on the previous high-growth model, we would need to keep imposing endless tax increase that could trigger a financial collapse. Per capita income will come to level off from now on. Fiscal expenditure must follow the same path. The only solution is to decrease fiscal expenditure to become proportionate to the population decline.

 Now, how can we secure necessary financial resources to reconstruct Tohoku? Fiscal expenditure in 2007 totaled about 100 trillion yen, of which 20 trillion was what I consider wasteful spending. By cutting out waste we can cover the cost for immediate priorities.

 To finance longer-term reconstruction, I suggest utilizing foreign capital. We can learn from the special economic zone in Chejudo Island, Korea, that achieved remarkable development by attracting foreign corporations and engineers. Preferential treatments, such as tax exemption, subsidies or simplified procedures, in such a newly established special economic zone in Tohoku will attract foreign businesses. Thanks to its excellent scientific technology and artisan skills, Tohoku will surely be an attractive destination for foreign businesses.

 We are at a crossroad, just as our predecessors had been through at times of the Meiji Restoration or the end of World War II. Declining and aging population in Japan oblige us to adopt a new method of thinking and different measures to be taken.