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The first in a 3-part series on the economic impact of aging in Japan

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The first in a 3-part series on the economic impact of aging in Japan

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Debt Japan's government debt exceeds that of other industrialised nations while gross debt is around 200% of GDP (in the US, UK and Germany the ratio is below 100%). While the financial markets are punishing Ireland, Greece and Portugal for their high public borrowings, Japan stands largely immune.

The anomaly exists for the government has always covered its debt through Japanese government bonds (“JGB”) about 90% of which are held by risk-adverse domestic investors. The result is that the government has not had to worry about foreign perceptions of its debt burden.


The Japanese population is shrinking, from a peak of 125M a few years ago to about 100M by 2050. At the same time, the proportion of people over 65 will rise to 40% by around 2050. The Mizuho Research Institute estimates that by 2025 around 70% of government spending will be consumed by debt service and social security spending. Yet with so few years left to rectify this situation, there still seems little sense of a pending crisis.

Debt & Demographics

As a higher proportion of people enter retirement, the household savings rate will turn negative as retirees spend their savings to cover necessities. The JGB market will then not be able to rely on domestic saving as it has in the past. Not only will these bonds become more volatile but when money has to be raised from overseas, interest rates will jump to international levels. More impactful is that foreigners will begin to have a say in Japanese economic policy – an unthinkable situation for a society as closely knit as Japan.


Japan has had steadily falling prices (consumer prices minus food and energy) for about the last decade. While shoppers might be content, the constant pressure to reduce price means that companies are unable build up reserves to invest. Collectively Japan is not generating the new goods and services or pioneering sophisticated manufacturing and service delivery methods that are an essential for an innovation-driven economy (see Asia Insider 76 “Japan not starting enough start-ups”).

Abetting this is the strong yen meaning those seeking to export are struggling. Some are moving production to locations where currency is not an issue – in essence; they are de-investing in Japan while moving know-how and infrastructure offshore. Those that stay loyal to their domestic workforce are seeing profit margins on export sales hit hard and have no money to invest in innovation.

A positive spin

The government seems to be resting its hopes on growth that capitalises on the changing demographics. This includes more employment in aged care as well as childcare for women return to the workforce. While in theory elderly care should expand, low wages and the difficult work mean that there are not a lot of Japanese willing to take up these positions. The government thus has to look for foreign workers to fill these roles.

Green technology is seen as another growing source of employment. Know-how in these areas may also be able to be exported to geographies that face similar issues.

Author’s Comment:

The commentary is around economic measures and ignores items associated with Gross National Happiness (a term coined in 1972 by Bhutan's King). Here Japan's low crime rate and advanced health care that delivers long life spans suggests a better quality of life than in many other countries with better economic scores.

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