Labour is one of the two main sources of economic growth. If the number of workers drops, output per worker has to rise to maintain the same level of production. There are ways to ease the demographic strains, such as encouraging more women, foreigners and older people to join the labour force, or seeking out fast-growing markets abroad. But if productivity does not increase enough to counteract a shrinking workforce, output—and eventually living standards—will decline.
For now the fall in Japan’s labour force is still accelerating. At the same time cheaper competitors in the region are forcing Japanese exporters to cut labour costs. And Japan has yet to recover fully from the withering effects of the 2008 global financial crisis.
Japanese companies have been substituting capital for labour for two decades, causing the overall number of hours worked to drop, writes Richard Katz of the Oriental Economist, a newsletter. “Since 1991 all of Japan’s growth in GDP has been due to higher productivity…If Japan wants to grow faster, it has to increase productivity. Demography and lack of immigration rule out any other path.”
In that sense, the two “lost decades” of economic stagnation in Japan since 1990 may turn out not to be an aberration but a taste of things to come. “What goes around comes around, and the same demographic profile that supported economic growth will now begin to weigh heavily on Japan’s economy. In fact, it will leave Japan with the lowest rate of economic growth among the large industrialised nations,” wrote Akihiko Matsutani of the National Graduate Institute for Policy Studies in his 2004 book, “Shrinking-Population Economics: Lessons from Japan”. He believes the unprecedented speed of the decline in Japan’s working-age population has made the slowdown worse, and having fewer young workers may be affecting Japan’s ability to innovate.
Mr Matsutani is not the only bear about Japan’s future growth rate. Japan has just been overtaken by China as the world’s second-largest economy. By 2050 Goldman Sachs expects it to have been overtaken by India, Brazil, Indonesia, Mexico and Turkey too. Takashi Inoguchi, a Japanese political scientist, bleakly refers to Japan as a potential “Argentina of the east”. Like the Latin American country, it might go from being one of the richest countries in the world to becoming sadly diminished only a few decades later.
Changing Japan's demographic patterns--specifically, patterns of family formation--seems an obvious must.