Annual Report on

The Japanese Economy and Public Finance

2005

- No Gains Without Reforms V -

Cabinet Office

Government of Japan


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Chapter 3

The "Demographic Wave" and its Impacts on the Economic Structure

Key Points of Chapter 3

Section 1 Demographic Change and its Economic Significance
 In 2007, two major demographic changes will commence: the population will begin to decline and the first baby boomer generation (hereafter Dankai) will begin to reach the mandatory retirement age. As a result, the decline in the labor force population will accelerate and the economic burden of the current working generation will rapidly increase.
 As the labor force population quantitatively declines, it is important to improve the quality of the labor force in order to increase productivity.
 As the value of the stock (including housing stock, financial assets, etc.) per person increases, its effective use becomes vital.

Section 2 The Demographic Wave and its Impact on Household Behavior
 The Dankai generation will shift to the older age group. This will in turn cause, for foreseeable future, a rise in the propensity to consume on a macroeconomic basis, centered on expenditure on culture and entertainment (digital home appliances, travel, etc.) and others.
 If medical expenses for the elderly grow at a rate higher than the economic growth rate, the future burden of these expenses will drastically increase. It is important to work to reduce the burden of future generations through medical care system reforms that prevent a deterioration of the generational balance.
 When only taking aging of the population as a factor, the household savings rate (around 8% in 2003) will deteriorate to around 3% by 2010.
 The risk tolerance of the older age groups is relatively higher than other age groups. Hence, it is relatively unlikely that a severe decline in demand for risky assets will occur due to the population aging.
 According to the survey, housing acquisition among Dankai Jr. generation (those born in 1971-1974) will peak when they are in their late 30s. On the other hand, there remains a challenge to utilize the existing housing stock, in particular to disseminate reverse mortgage utilization.

Section 3 The Demographic Wave and Business Competitiveness
 According to the estimate, the labor cost of companies will decrease by 2.6% until 2009 as the Dankai generation will be reaching the mandatory retirement age.
 On the other hand, as the Dankai generation reaches the mandatory retirement age, increasing pressure will be imposed on burdens related to retirement benefits such as retirement lump sum grants and corporate pensions.
 According to an analysis using microeconomic data, an employment dampening effect was detected at workplaces with a higher proportion of Dankai generation employees.
 Companies will actively recruit new graduates. Companies that have restrained employment of younger generations in the past and those with strong business sentiments have a higher tendency to have plans to increase employment.
 From the perspective of corporate competitiveness, it is important for companies to engage in efforts to pass down skills of the workers through such measures as continuing to employ elderly workers with enthusiasm and talents.

Section 4 The Source of Innovation and the Challenge to Improve Competitiveness
 As the population declines, improving productivity is essential. It is necessary for companies to strengthen their competitiveness through the creation of technology with high added value.
 The source of competitiveness is nothing other than innovation. In order to achieve innovation and the resulting productivity improvement, the development of organizations to utilize technology in management, and enhancing the quality and quantity of human resources are important.
 Another challenge is innovation in the service industries and the resulting productivity improvement.


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