Monday, April 23, 2007

Japan and the fertility trap-a worst case scenario?

The way I understand how a negative scenario for population dynamics could play out in Japan is as follows:

Japan has a large segment of its population that is approaching retirement. When all of those people retire, they expected to be supported by the working population which is now far too small to support the large number of retired persons. Of course, theoretically those retirees should have some significant savings since we've been informed for years that the Japanese are great savers. So the burden of supporting a large retired population with a small labor force might be delayed for a few years. On the other hand, the use of savings by the retirees forms a wave of dis-investment that could torpedo efforts to offset the shrinkage of the workforce with robotic or mechanized production(of which much has been made in the press).

Political and social division ensue. Leaving aside the options the Japanese government has for handling that situation, pretty soon thereafter members of that retired group start dying. In 2006, according to's World Population Datasheet, there were 9 births for every 8 deaths in Japan. When the retirees start dying off, that ratio reverses and could go fairly high in the other direction, say 12 people dying for every 8 born. So massive population shrinkage ensues.

Since the population is shrinking, domestic demand naturally is shrinking as well, and therefore Japan becomes even more dependent on exports for positive GDP growth. In reality, once the ratio of births to deaths goes much below 1.0, positive GDP growth is not possible. The shrinkage in domestic demand will be too much for any increase in exports to overcome. And when the yen's value versus other currencies eventually rises to a realistic value, exports will drop off as well.

Since the population is shrinking, real estate prices decline steadily as well. So there could be a negative home equity effect on consumer spending.

Another major problem will be the large national debt built up which now will need to be covered by the output of a much smaller labor force. A default by Japan on its sovereign debt could occur.

Did I leave anything out?


CV said...

Hi Scott,

Thansk for your comment on AS ...

No, I do not think you left anything out and this is indeed some kind of worst case scenario we could be looking at.

In essence, we do not know exactly what kind of effects a potential 'fertility trap' would have on the real economy but clearly what you are arguing could be a plausible outcome althouhg we should of course not hope that it ever comes to that.

I also agree on the debt issues and really this is where the pain is going to be felt at some point and perhaps very soon (i.e. within 5 years). On this note, it makes little sense that S&P just went out at raised Japan's credit rating since it is almost sure to downgrade them again at some point.

Kishore said...

Population trends tend to be cyclical. The decline in birth rates in Japan have bottomed out and they have started to increase although they are still below replacement rates. You have to also look at other factors such as the emergence of an innovation economy in Japan which is reason to believe that the turnaround will be sustained for some years.

trampjuicerocks said...

A faux worry I think longer term.
The down and out birthrate is a leftover from the 1989 property boom, as young families could not afford the space to raise kids leaving a generation of young women stuck at home.
As property prices came down and borrowing rates have plunged the real cost of a home is creating more families and youngsters.

With the advantage of very little immigration, rising real wages for the young families will lever thier purchasing power over real estate and local assets and within 20 years the population will stabilise.

What matter's for the population of Japan is GDP per capita, not overall GDP. If anything, with the vastly increased life expectancy of the old, at worst thier may have to be a reckoning with increased old timer partipation in the workforce and a trimming of benefits.

Of course, there is a small danger that if the wrong policies are persued the currency will collapse and hyper inflation will wreak the economy for a decade or so.

I believe in national characteristics, and the Japanese have proved themselves time and time again in both innovation and competitiveness throughout the past 1000 years.

If population is the vital factor of economic growth, why is not overpopulated Mexico, Nigeria or Bangledesh or even Iran rich?

Because its PRODUCTIVITY per PERSON which drives gains in living standards - 90% of all economoic growth in the USA in the past 100 years is from TECHNOLOGY and INNOVATION making people PER CAPITA RICHER in produce. (source: MIT)