Annual Report on the Japanese

Economy and Public Finance


- No Gains Without Reforms III -

October 2003

Cabinet Office

Government of Japan

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Chapter 3

Addressing Aging and Declining Population

    The aging of the population in Japan has been advancing at a fast speed not seen in other countries before. Due to the declining birthrate, Japan's productive population has been on the decrease after hitting a peak in 1995 and its total population is expected to start decreasing after hitting a peak in 2006. Japan was able to achieve high economic growth through the input of its abundant labour force and expansion of demand due to the consistent population increases after World War II. Japan's public sector, centering on the social security system, was established on the assumption of a population structure in which there are many young people and fewer elderly people. However, the recent population aging and the expected decrease in total population have undermined that assumption, pressing Japan to review its conventional economic growth pattern and to reform its public sector. Faced with these situations, people tend to have a pessimistic view of the future.
    However, pessimism only results in the actual realization of the pessimistic scenario, like a self-fulfilling expectation. What must be done now is to minimize the impact of the change in population structure on labour input, etc. and strive to shift to a social and economic system that is sustainable and viable. In Chapter 3, we will study the direction that the Japanese economy and society should take under the aging population and declining population, based on the awareness of the issues. This chapter consists of the following three sections.
    In Section 1, we analyze the factors behind the population aging and declining population and study what measures should be taken to turn the excessively declining birthrate upward. In addition, we study measures to effectively utilize female and elderly labour force in order to ease the effect of the declining productive population that is expected to advance even if the decline in the birthrate is checked. In Section 2, we bring together the pessimistic and optimistic views of economic growth under the aging and declining population and examine each point in question by using cross-country data in order to study the shape of future economic growth. In Section 3, we take up the impact of the aging and declining population on the public sector from the standpoint of a rise in the national burden rate, and discuss what should be done to make the administrative and fiscal systems of the national and local governments and their social security systems, mainly pension and medical systems, responsive to the low growth of the economy and the change in population structure.
    The discussions in this chapter reveal the following points: (1) The rapid advance in the aging and declining population will have a far-reaching impact on future economic growth, but its specific impact will largely depend on future policy efforts. (2) The aging and declining population has raised questions about the sustainability of the public finance and social security systems, in addition to its impact on economic growth. But the institutional reform has been only half completed. In order not to shift the burden to future generations, its full completion should be expedited. (3) When implementing institutional reform, it is important to strive for the establishment of strong systems by taking into account the downward risks of population movement and economic growth.

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