Japan may finally have an answer to its demographic crisis

While a recent round of wage negotiations saw large Japanese companies agree to raises of 5.3%, it remains unclear they can pass them on to consumers.
While a recent round of wage negotiations saw large Japanese companies agree to raises of 5.3%, it remains unclear they can pass them on to consumers.


  • One of the world’s most closed societies has found that its economy must open up to immigrants.

Last week, the Japanese government announced it had passed an alarming milestone. The native population of the country had fallen by 837,000 in the 12 months to October 2023, a decline of almost 100 people an hour. The world has shifted from dire predictions in the 1960s of a population explosion to today’s all-too-optimistic view that large youthful populations are a guarantee of demographic dividends in places like India and Africa, but Japan has always been an outlier. Call it the country of a population implosion. Last year, its labour force shrank for the first time. This is a millstone it has been able to navigate its way around in recent years because the labour force participation of women increased. And in February, the government announced that the number of babies born in 2023 showed a 5.1% decline. The number of people in the country above the age of 65 is almost 30%.

In a seemingly unrelated event, the other big headline out of Tokyo last month was that Japan’s central bank had raised interest rates for the first time since 2007. Rates rose to a marginal 0.1%, but proof that wages are rising at a decent clip of 4-5% suggests that inflation of about 2%, the central bank’s repeatedly stated aim, may be here to stay. The central bank that pioneered quantitative easing and has run an ultra-loose monetary policy for decades finally appears to be saying the policy has served its purpose.

The two seemingly separate events are connected, of course. It is precisely because Japan has been ageing so rapidly that savers have been content to leave their money with banks or post offices, even if an era of negative interest rates penalized them for doing so. Unusually for a developed country, more than half of Japanese savings are in deposits. Indeed, the stock-market bull run of the past year has been largely driven by foreign optimism about the country’s prospects.

Plenty of questions loom in assessing whether Japan is finally becoming a ‘normal’ economy, as the Financial Times asked in an article earlier this month. (A parenthetical question: Which major economy looks normal in a world of seemingly persistent higher inflation and high public debt ?)

While a recent round of wage negotiations saw large Japanese companies agree to raises of 5.3%, it remains unclear they can pass them on to consumers. Retail spending has been strong, but that is strongly influenced by record tourist numbers last year.

Izumi Devalier, head of Japan economics at Bank of America, told the FT recently that although some tourism industries are raising prices (rail fares are up, for instance), the country is not seeing “a sufficient breadth" of price increases. She notes that the Japanese government has—unusually—been encouraging smaller companies to stand firm in pushing for higher prices from large firms. But, with almost a third of its people above 65, this segment of the population may simply cut back expenditure if confronted with higher prices.

The real issue is that, as with rapid population growth, governments everywhere struggle to turn demographic changes around. Rapidly ageing populations now characterize much of Europe and East Asia. Countries as diverse as South Korea and Nordic countries have very low fertility rates. China too, after abandoning its misguided one-child policy, has found that fewer young women want to marry, let alone have children. In that sense, both in terms of exiting quantitative-easing being harder than central banks had anticipated and arresting falling fertility rates, Japan is a mirror to the developed world, albeit of an unsettling kind.

Last year, marriages dropped to less than half a million, the lowest level since the 1930s. Reworking Jane Austen’s famous line, across East Asia, a single woman in possession of a job and graduate degree is less likely than ever to be in want of a husband. The Japanese government, run mostly by men, seems to feel this is all about the difficulties of child rearing in expensive, crowded cities. Its subsidies to induce couples to have more children include additional childcare handouts if couples have three or more kids. In January 2023, it quixotically introduced a $7,600 incentive per child for those parents who move out of crowded cities and stay away for five years. In fact, married couples in Japan have on average 1.9 children, which is close enough to the replacement rate, but fewer than ever are getting married. An aversion to living together, as so many couples do in the West, only compounds the problem.

The Japanese government’s social engineering on a grand scale has little to show for it thus far. Last month, a British academic writing to the FT may have come up with a better explanation than the government’s: Japanese women graduates overwhelmingly want to marry graduates, but the trouble is there are more women graduates than men. A staggering one-fourth of Japanese men and women in the age group of 18-39 are estimated not to have had sex, according to data cited by the UK academic John Bateson. The aversion to living together without marrying worsens the problem of too few couples and too few children. Japanese law, meanwhile, allows only one family name after marriage; more than 90% of couples take the man’s name. For professional women, this is almost certainly an issue. For Japan on the whole, the answer is immigration. One of the world’s most closed societies has begun to open its doors to skilled workers from elsewhere. Last June, the number of foreigners living in Japan hit a record 3.2 million.

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