Annual Report on the Japanese

Economy and Public Finance

2002-2003

- No Gains Without Reforms III -

October 2003

Cabinet Office

Government of Japan


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Section 1 Meaning of Aging and Declining Population

    The advance in the aging of population and a decrease in population that Japan is certain to witness in the coming years are a serious cause of concern for the future of the Japanese economy and society, as they affect economic growth and the public sector, mainly the social security system. The advance in the declining birthrate and aging population is a phenomenon seen in many countries, not limited to Japan, as it takes place as a result of a rise in income levels, progress in medical technology, and a change in people's sense of values brought about by economic growth. However, the declining birthrate/aging population in Japan is advancing much faster than in other industrialized countries. If conventional systems are left as they are, it would cause various problems. In order to ease the impact of the aging and declining population, it is important to halt the excessive decline in birthrate by developing an environment where women who want to have children can bear and raise children. Even if the birthrate turns upward, however, the decrease in the number of workers is expected to continue for a long time. Therefore, in order to ease the impact of the labour force decline, Japan will have to encourage women and elderly people to work.
    In this section, we will study the present state of and the background to the aging and declining population in Japan and discuss problems that must be solved in order to turn the birthrate upward and to encourage women and elderly people to work.

1. Progress in Aging and Declining Population
Progress in declining birthrate
    The trend of declining birthrate has been continuing unchecked. Japan's total fertility rate(1)hit an all-time low of 1.32 in 2002, down 0.01 point from the previous year(2).
    Japan's fertility rate stood at 4.54 in 1947, dropped sharply around 1960 and remained stable at around 2.0 during the period of high economic growth in the 1960s and 1970s except for a sharp drop in 1966 (See Figure 3-1-1). It then turned downward again and hit 1.32 in 2002 after what was known as the "1.57 shock"(3)of 1989. This means Japan's fertility rate is well below 2.07, the rate considered necessary to maintain the current level of population.
    Japan's birthrate has been declining much faster than the birthrate estimated every five years by "Population Projections for Japan (National Institute of Population and Society Security Research)" (hereinafter referred to as "future estimated population").
    According to the median variant projection of the future estimated population calculated in January 2002, Japan's total fertility rate will recover moderately after falling to 1.31 in 2007 and remain stable at around 1.39 in the long run. On the other hand, the low variant projection of the future estimated population projects that the total fertility rate will continue to fall from 1.36 in 2000 and hit 1.10 in 2050.
Figure 3-1-1 Changes in Total Fertility Rate and Number of Childbirth

Progress in aging of population
    Japan's population aging is also advancing along with the declining birthrate. As of Oct. 1, 2002, the number of elderly people (those aged 65 or older) stood at 23.63 million and the elderly people ratio (share of Japan's total population made up by elderly people) stood at 18.5%(4).
    The aging of the population in Japan is characterized by the extremely fast speed at which it is occurring. A comparison of the number of years required for a country's elderly people ratio to rise from 7% to 14%(5)shows that it took 115 years in France, 85 years in Sweden, 40 years in Germany, and 47 years in the U.K. By comparison, it took only 24 years for Japan's elderly people ratio to rise from 7% in 1970 to 14% in 1994 (See Figure 3-1-2).
    According to the median variant projection of the future estimated population, the elderly people ratio in Japan is projected to continue rising, hitting 28.7% in 2025 and 35.7% in 2050. This means that an elderly person (aged 65 or older), who is currently supported by about 3.6 people of the working generation (20-64 years old), has to be supported by about 1.9 people in 2025 and by about 1.4 people in 2050. As a result, Japan will become the most advanced aging country among industrialized countries, exceeding Italy.
Figure 3-1-2 Share of Population Made Up by Elderly in Industrialized Countries

Advent of society with decreasing population
    Amid the advance in the declining birthrate and aging population, the population of Japan is expected to start decreasing after hitting a peak of 127.74 million in 2006, as the number of deaths is forecast to exceed the number of births. This indicates that Japan has gone through the phase in which the percentage of elderly people increases due to the declining birthrate and will enter a new phase in which its population decreases due to declining birthrate. According to the median variant projection of the future estimated population, Japan's population is forecast to come to 121.14 million in 2025 and to 100.6 million in 2050(6)(7)(See Figure 3-1-3).
    The declining birthrate and aging population also change the age composition of population drastically. It is forecast that not only the ratio of juvenile population (0-14 years old) to total population but also the ratio of productive population (15-64 years old) to total population will decrease (See Figure 3-1-3). In 2000, the productive population stood at 86.22 million, accounting for 68.1% of total population. It is forecast that the productive population will decrease to 53.89 million in 2050, accounting for 53.6% of total population. A decrease in productive population restrains economic growth, as it reduces labour input. It is feared that a decline in the ratio of productive population to total population may destabilize the foundation of the social security system, as it means a decrease in the number of people supporting elderly people.
Figure 3-1-3 Japan's Total Population (Median Variant Projection)

2. Background to Aging and Declining Population
Background to declining birthrate: General tendencies to remain unmarried, marry later and delay having children; decreased fertility among married couples
    The birthrate in Japan has declined due to the general tendencies to remain unmarried, marry later and delay having children.
    First, we will look at the tendency to remain unmarried. The percentage of unmarried people, which stood at 28.5% for men and 20.9% for women in 1980, rose to 31.8% for men and 23.7% for women in 2000(8). The tendency becomes more evident if viewed by age group. From 1980 to 2000, the percentage of unmarried people in the 25-29 age group jumped from 55.1% to 69.3% for men and from 24.0% to 54.0% for women and the percentage of unmarried people in the 30-34 age group rose from 21.5% to 42.9% for men and from 9.1% to 26.6% for women(9).
    Next, we will consider the tendency to marry later. In 1980, the average age at first marriage stood at 27.8 years for men and 25.2 for women, but these rose to 29.1 for men and 27.4 for women in 2002.(10) In line with the tendency to marry later, the tendency to delay having children has also been advancing. The average age at which women had their first child was 25.7 in 1975, but it rose to 28.3 in 2002.
    In addition to the conventional factors mentioned above, the decrease in the reproductive behavior of married couple lies behind the recent decrease in the birthrate. According to the "The Twelfth Japanese National Fertility Survey" by the National Institute of Population and Social Security Research, the completed number of births (the average number of children given birth to by couples in marriage for 15-19 years, the period during which childbearing is believed to have completed) stood at 2.23 in 2002. The number has remained almost unchanged for 30 years. However, recent surveys show that the average numbers of children of couples in marriage for 5-9 years and for 10-14 years have been on a decreasing trend. This suggests that the completed number of births is likely to decrease in the future (See Figure 3-1-4 (1)).
    Due to the factors mentioned above, the highest distribution of age-specific fertility rate moves to the right side (or older age) and the level of overall fertility rate declines as years pass (See Figure 3-1-4 (2)).
Figure 3-1-4 (1) Average Number of Childbirths by Marriage Duration
Figure 3-1-4 (2) Changes in Age-Specific Fertility Rate

Factors behind declining birthrate: Rise in costs for raising children
    There are various factors behind the declining birthrate. Here, we would like to look at costs for raising children, which is one of the main ones.
    People raise children for various reasons. However, if we focus only on the economic aspect of child-raising and eliminate other factors, it is generally pointed out that children have the following three roles: (1) they have a role as labour force to work and support their parents, (2) they have a role in a social security capacity of looking after their parents when their parents reach old age, and (3) they have a role of pleasing their parents by fulfilling their service consumption objectives. However, the meaning of having children has changed due to the economic and social changes brought about by economic growth, etc. Specifically, Role (1) for children has declined due to a decrease in the number of farmers and self-employed workers brought about by changes in the industrial structure. Role (2) is also believed to have declined due to improvement of the social security system and an increase in the number of parents who do not want to be looked after by their children. Consequently, it is believed that the meaning of having children of expecting them to fulfil Role (3) has increased.
    As having children is no longer an indispensable condition for earning a living, people are believed to decide whether or not to have children by weighing "the utility of having children" against "the things that can be done with money that would otherwise be spent on childbearing." The latter is called "opportunity costs," which is different from direct costs for bringing up children but rather "costs lost due to childbearing."
    The opportunity costs for childbirth and child-raising are believed to have increased in recent years due to the popularization of higher education among women and a narrowing wage disparity between men and women. In fact, the wage disparity between men and women, as measured by contractual cash earnings of full-time workers, has been narrowing and the average wage disparity of all groups stood at 66.5 (as against 100 for men) in 2002 (See Figure 3-1-5). A calculation of opportunity costs(11)in terms of income by using the wage curve of university-graduate women shows that in the case of a university-graduate woman who gives birth to a baby at the age of 28 and quits her job at the same time and is reemployed at the age of 34 after the child enters elementary school, her lost income amounts to about 85 million yen(12) as compared with the case of continuing employment. The fact that the discontinuation of employment due to childbirth and child-raising causes a huge amount of opportunity costs is believed to be a major factor that dissuades women from giving birth to a baby (See Figure 3-1-6).
    The ratio of education expense, which is part of direct costs for child-raising, to total consumption expenses has doubled in the last 30 years. Moreover, the cost of sending a child to private junior and senior high school amounts to more than 1 million yen a year and that for sending a child to a private university costs more than 2 million yen a year(13).
    The rising costs for childbirth and child-raising is one of the major factors behind the declining birthrate in recent years. If childbirth/child-raising and women's employment were compatible, there would be no opportunity costs caused by discontinuation of employment. In reality, however, it is difficult for women to keep working while raising children due to, among other factors, a work environment that makes the balancing of work and family difficult, the tendency of child-raising families to be isolated due to the urbanization and spread of the nuclear family, and lack of nursery centers and other facilities to support child-raising families. In addition, changes in the people's sense of value about marriage and child-raising, rising psychological and physical burdens of raising children, and long working hours and other actual work conditions all discourage people from having children.
Figure 3-1-5 Changes in Wage Disparity between Men and Women by Age Group
Figure 3-1-6 Income Loss on Retirement on Childbirth and Child-Raising (Case of Women University Graduates)

Factors behind the aging population: A fall in the death rate accompanying expanding lifespans
    One factor behind the aging population is the fall in the death rate accompanying expanding lifespans. The death rate(14) in Japan dropped as much as 50% in about 15 years from 14.6 in 1947, as the death rate of young people fell sharply thanks to the improvement in the living environment, better dietary conditions, and the advance in medical technology (See Figure 3-1-7). Thereafter, the rate continued to decline gently, hitting a record low of 6.0 in 1979. In recent years, the death rate has been on a mild upward trend, hitting 7.8 in 2002.(15) The recent upward trend in the death rate is due to a rise in the ratio of elderly people, whose death rate is higher than in other age groups, to total population. The death rate calculated on the assumption that there is no change in age composition (age-adjusted death rate)(16) has been decreasing consistently both for men and women(17)(See Figure 3-1-7).
    In line with a decline in the death rate, the average lifespan(18) of Japanese people increased from 50.06 years for men and 53.96 years for women in 1947 to 78.32 years for men and 85.23 for women in 2002(19). The average lifespan is expected to increase further.
Figure 3-1-7 Changes in Death Rate

3. Is a Birthrate Upturn Possible?
Basic ideas for measures to cope with declining birthrate
    As we have described so far, a society with a declining population will become the reality in Japan before long due to the advance in declining birthrate and aging population. A society with a declining population has the positive aspects of removing the problem of overpopulation due to a decrease in population density and of lessening the burden on the environment due to a decrease in resource and energy consumption. However, a decrease in productive population and a decline in savings rate would constrain economic growth. Moreover, the fiscal conditions of the public sector, mainly social security, are likely to deteriorate significantly, as the ratio of elderly people to the working generations, who mainly shoulder tax and social security burdens, increases in such a society. If the low birthrate continues, even if it is a reasonable choice for individuals under the given conditions, it would have a negative impact on the society as a whole. In view of the far-reaching impact that the excessive decline in birthrate has on Japan's labour supply and social security system, it is important to take measures to increase the birthrate and support child-raising.
    It goes without saying that whether to bear children or not should be first and foremost left to the discretion of the parents and the family. However, if people cannot have babies due to social system reasons or others, it is a problem. According to the Twelfth Japanese National Fertility Survey, the ideal number of children for a married couple has exceeded the actual number of childbirths (the average number of childbirths of a woman in marriage for 15-19 years) since the survey was first conducted in 1977 (See Figure 3-1-8). In order to narrow the disparity between the ideal number of children and the average childbirths, it is necessary to improve the environment so that any woman who wants children can deliver and raise children without anxiety, by eliminating various barriers that prevent child-raising and by supporting child-raising by the society as a whole.
    One of the main reasons for the decline in the birthrate is that women cannot get jobs and work while delivering and raising children. In the present circumstances, women are often faced with a choice of either work or childbirth/child-raising. Therefore, it is important to reform economic and social systems and practices to allow women to get jobs and work while delivering and raising children. A study of the relationship between an index that shows women's social participation (GEM)(20) and the total fertility rates in major advanced countries show that women's social participation is not necessarily incompatible with delivering and raising children (See Figure 3-1-9). We believe that establishing economic and social systems that make work and childbirth/child-raising compatible and promoting gender equality in family life will help increase the birthrate in Japan.
Figure 3-1-8 Average Childbirths and Average Ideal Number of Children
Figure 3-1-9 Correlation Diagram Birthrate and Women's Social Participation in Major Advanced Countries

Promotion of birthrate-boosting measures
    The declining birthrate and aging population is a problem common to advanced countries and they have adopted various measures designed to increase birthrates (See Appended Table 3-1). Japan, for one, adopted the "Immediate Action Plan to Support the Development of the Next-Generation" on March 14, 2003, in the belief that "in order to change the course of the declining birthrate, it is necessary to take intensified measures, in addition to conventional measures." Under the Action Plan, comprehensive measures will be promoted efficiently and effectively to implement "review of work modes, including for men," "regional support for child-raising," "support of next-generation people in social security," and "promotion of the socialization and independence of children," in addition to "support for raising children and working at the same time."
    In July 2003, "the Basic Law on Measures for the Society with a Declining Birthrate" (hereinafter to be called the "Basic Law") and the "Law for Measures to Support the Development of the Next-Generation" (hereinafter to be called the "Next-Generation Law") came into force. The Basic Law stipulates the basic philosophy for measures to be taken in the society with fewer children, responsibilities of the central and local governments, and outline of government's measures. The Next-Generation Law prescribes guidelines for formulating action plans by the government, local governments and business operators to develop the environment necessary to bring up healthy children. If these efforts lead to the improvement of child-raising support by local communities, review of work modes, including for men, at companies, and the compatibility of work and family life, it will be possible to reverse the declining birthrate to a certain extent.
    However, even if the birthrate turned upward thanks to these efforts, it would not immediately lead to a structural change in the population. Since the birthrate trend at present determines the population structure of the next 70-80 years, it would be virtually impossible to rectify the distortion in the population structure unless extreme measures, such as accepting an inflow of a large number of foreigners/immigrant workers, are adopted (See Column 3-1). Japan must establish economic and social systems on the premise of the aging and declining population.

4. Encouraging Women and Elderly People to Work
Enhancement of labour force participation rate of women and elderly people)
    A shift to a society with less population is expected to lead to a decrease in labour supply. Some people maintain that Japan does not necessarily face a labour shortage, if the Japanese economic achieves a labour-saving industrial structure as a result of progress toward a knowledge- and technology-intensive society. On the other hand, it is expected that labour-intensive fields, such as welfare and care services, will expand in line with the aging of population. Therefore, in order to ease the impact of the decrease in labour supply, it is essential to promote employment of women and elderly people wishing to work.
    The age-wise labour force participation rate(21) for women in Japan takes the shape of an M curve, with the rate declining for women in their late 20s and 30s due to childbirth and child-raising (See Figure 3-1-10). This is believed to indicate that women give up work due to the difficulty of getting jobs and work while delivering and raising children, a phenomenon not seen in other advanced countries. Compared with 10 years before, the labour force participation rate for women rose as a whole due to women's participation in society, with the rate for women of 30-34 years old, the bottom of the M-shaped curve, rising to 60.0% in 2002. But the rise is not sharp enough to correct the M-shaped curve.
    What if women who do not have a job now but want to work if conditions are met actually get jobs? The M-shaped curve of the age-wise labour force participation rate may be corrected, given the potential labour force participation rate, or the actual labour force participation rate plus people wishing to work (See Figure 3-1-10). This suggests that the women's labour force participation rate can be raised, if support for women to enable them to both work and raise children is promoted.
    Increased labour force participation by women, especially women raising children, may help offset a future decline in the productive population. However, in order to further raise the labour force participation rate, it is necessary to boost the labour force participation rate for elderly people, whose share of the total population will increase.
Figure 3-1-10 Women's Actual and Potential Labour Force Participation Rates
    Japan's labour force participation rate for elderly people is higher than in other countries (See Figure 3-1-11). The labour force participation rate for elderly people in their early 60s is above 50% and that for people aged 65 or older is above 20%, both higher than in other countries. This indicates that Japanese elderly people have relatively strong desire for employment.
    However, the labour force participation rate for elderly people has been on a downward trend recently. This may be partly because of the facts that the percentage of older people in people aged 65 or higher has increased and that the economic power of elderly people has increased thanks to the improvement of social security. But it may be mainly because of the fact that the employment opportunities for elderly people have decreased due to a decrease in the number of self-employed individuals and to the deterioration of economic conditions. The employment situation of elderly people has become severe, with the unemployment rate of people aged 60-64 standing at 7.7% in 2002(22). This suggests that the elderly people who are willing to work are not fully utilized.
Figure 3-1-11 Labour Force Participation Rate for Elderly People

Encouraging women and elderly people to get jobs
    We have thus looked at the employment situation of women and elderly people and found that they are unable to find jobs despite of their strong desire for employment. In order to ease the decrease in labour force population that is expected to pick up momentum in the near future, it is important to develop an employment environment that will allow people to choose diversified working styles that meet their individual work skills and lifestyles and let them exert their potential to the full extent.
    To this end, development of an easy-to-work environment for women and elderly people must be promoted by diversifying working styles, such as establishment of a wage and promotion system based on skill and ability, expansion of flexible work modes like short working hours and work on every other day, and ensuring employment (reemployment) and job opportunities. As for specific measures for women and elderly people, the following should be considered.
    With regard to women, it is basically important to improve nursery centers in order to make it possible for women to get jobs and work while raising children. The importance of improving nursery centers is evident from the relationship between nursery center capacity and women's employment rate. A study of the relationship between nursery center capacity per woman that have a baby and women's employment rate shows that the larger a nursery center capacity is, the higher the women's employment rate(23) (See Figure 3-1-12). For families with early elementary school children, expansion of after-school sound child rearing program(24) is important. These measures are now being implemented under the Angel Plan (December 1996) and the New Angel Plan (December 1998). It is also important to establish a work environment to allow women to continue to work while raising children. Specifically, an environment that makes it easy for women to take maternity leave and return to work should be established and working styles should be diversified.
    In addition, with regard to women and their employment, households with full-time homemakers are given preferential treatment due to the existence of a third-party insured system in the public pension,(25) the tax deduction system for spouse in the tax system,(26) and allowances for spouse in corporations' benefit programs. In order to effectively utilize the female labour force, which is expected to increase in importance, tax and pension systems should be made neutral to women's decisions to work or not.
    As for elderly people, since the age of pension payment eligibility under the public pension system is scheduled to be gradually raised to 65, it has become increasingly necessary to ensure employment opportunities for people aged up to 65 at least. Therefore, measures should be taken to ensure stable employment for people aged up to 65 by raising the mandatory retirement age and promoting the introduction of continued employment systems. When doing so, elderly people should be allowed to choose from diversified working styles to meet their individual work skills.
    Although improvement has been made in the public pension system, it is still pointed out that the old-age pension for active employees(27) is discouraging elderly people from working. Since social security benefit expenditures are expected to increase dramatically in line with the aging of the population, the economic significance of elderly people having jobs and continuing to be on the side of supporting the social security system is huge.
Figure 3-1-12 Correlation between Nursery Center Capacity and Women's Employment Rate

Column 3-1
Acceptance of Foreigners/Immigrant Workers

    Acceptance of foreigners/immigrant workers(28) is often discussed in Japan as a way to make up for the decreasing productive population. How should Japan handle this problem?
    The declining birthrate and aging population is a problem common to industrial countries. Germany, which accepts the largest number of foreigners/immigrant workers among EU countries, has been implementing foreigners/immigrant policies to cope with labour shortage and stabilize social security systems. The number of foreigners/immigrant workers living in Germany is about 7.3 million, accounting for 8.9% of the country's total population. The United States, for its part, has been promoting the acceptance of immigrants coming to the country for the purpose of family integration or engaging in professional work. The country accepted an average of 900,000 immigrants over the last 10 years and the number of foreigners(29) now account for 10.6% of the total population (figures for 2000).
    The number of foreign residents in Japan stood at 1.78 million as of the end of 2001 (about 1.4% of the total population). The number represented a 1.5-fold increase in 10 years (an annual increase of 50,000 people on average) and is expected to continue increasing. However, the decrease of population in Japan is much faster. If Japan wants to make up for the decrease by accepting foreigners/immigrants, it would have to accept 340,000 foreigners/immigrants a year to maintain its population at current levels and about 640,000 foreigners/immigrant to maintain its current level of productive population.
    Given the current situation of Japanese society with regards to foreigners, it would cause many problems if Japan decided to accept more than 10 times as many foreigners/immigrant workers as at present on a continuous basis. Accepting foreigners/immigrant workers must be studied carefully, since doing so has a profound impact not only on the Japanese economy and society in terms of domestic labour market and social costs but also on the foreigners/immigrant workers themselves and their home countries.
    However, from the standpoint of revitalizing and internationalizing the Japanese economy and society, it is important to accept foreigners/immigrant workers in professional and technical fields regardless of their nationality, age or gender, and therefore Japan must establish a system under which people willing to work and having capabilities can find employment, and to enhance the attractiveness of working in Japan.
Scale of Immigrants by Type of Scenario concerning Immigrant Acceptance in Advanced Countries (2000-2050)


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