Japan shows how to grow sustainability amid a shrinking population

By Leith van Onselen

For more than a decade, the Productivity Commission has debunked the common myth that immigration can overcome population ageing. For example:

  • PC (2005): Despite popular thinking to the contrary, immigration policy is also not a feasible countermeasure [to an ageing population]. It affects population numbers more than the age structure”.
  • PC (2010): “Realistic changes in migration levels also make little difference to the age structure of the population in the future, with any effect being temporary“…
  • PC (2011): “…substantial increases in the level of net overseas migration would have only modest effects on population ageing and the impacts would be temporary, since immigrants themselves age… It follows that, rather than seeking to mitigate the ageing of the population, policy should seek to influence the potential economic and other impacts”…
  • PC (2016): “[Immigration] delays rather than eliminates population ageing. In the long term, underlying trends in life expectancy mean that permanent immigrants (as they age) will themselves add to the proportion of the population aged 65 and over”.

In a nutshell, trying to overcome an ageing population through higher immigration is a Ponzi scheme.  It requires ever more immigration, with the associated negative impacts on economic and social infrastructure, congestion, housing affordability, and the environment.

The obvious question that follows is, if immigration is not the solution to the ‘problem’ of population ageing, then what is? Enter Japan, whose population is both shrinking and ageing quickly:

And whose labour market is tight, with Japan’s unemployment rate recently hitting a 22-year low of just 2.8% (if only Australia was so lucky!):

Rather than open the immigration spigots for a short-term fix, and in the process crush-load infrastructure and housing, Japan has instead taken the high tech route of engaging in automation.

After spending a decade worrying about the rise of Japan, economists (and population boosters) in Australia now often label Japan an ‘economic basket case’ due to its ageing population. But the facts do not back this assertion up. In addition to having an unemployment rate that Australian workers could only dream of, as well as a relatively affordable housing market, Japan’s GDP growth in per capita terms has been highly respectable, as it has been for most other nations with declining populations:

These facts have not been lost on Project Syndicate, which has penned the following rebuke to the clam that Japan is facing a ‘dismal’ future due to population ageing:

Contrary to popular belief, Japan has been extraordinarily successful in achieving economic growth, given its rapidly aging population and lack of inflation…

Demography is not destiny, at least not entirely… Yet demographic factors are often neglected in economic reporting, leading to significant distortions in assessments of countries’ performance. Nowhere is this more apparent than in Japan.

With real output – the key measure of economic performance – having risen by only about 15% since 2000, or less than 1% per year, Japan easily seems the least dynamic of the worlds’ major economies. But given Japan’s demographics – the country’s working-age population has been shrinking by almost 1% per year since the start of this century – this result is remarkable.

In fact, Japan’s growth rate per working-age person was close to 2% – much higher than in the US or in Europe. Though the US economy grew more than 35% since 2000, its working-age population also grew markedly, leaving the annual growth rate per working-age person at only about 1%.

That indicator – growth rate per working-age person – is not widely used by economists, who instead focus on GDP per capita. By that measure, Japan is doing about as well as Europe and the US. But, while per capita indicators are useful for assessing a country’s consumption potential, they do not provide an adequate picture of growth potential, because they include the elderly and the young, who do not contribute to production. Even in Japan, with its high life expectancy, those over the age of 70 do not contribute much to output.

So, given its rapidly declining potential, Japan has been extraordinarily successful. A key reason is that it has put a growing proportion of its working-age population to work: unemployment is today at a record low of less than 3%, and almost 80% of those who could work have a job, compared to about 70% for Europe and the US.

Japan’s achievement of full employment and high job growth over the last two decades is all the more noteworthy in view of near-permanent deflation during this period (most prices are still lower today than they were 15-20 years ago). This should give food for thought to those who maintain that deflation imposes unbearable economic costs…

Another lesson from Japan is that a country with a large savings surplus can handle a large public debt, because it can be financed internally…

There are broader reasons why Japan’s economy is performing well on a per capita basis.

First, while Australia has built houses and imported migrants to live in them, Japan has built an extensive infrastructure system with world-class trains, roads, tunnels, bridges and internet – all of which has raised the living standards (and productivity) of the incumbent population.

Second, while much of this infrastructure has been financed by government debt, the bulk of Japanese debt is contained inside Japan, financed by Japanese investors, banks, pension funds, and the central bank, rather than via borrowings from the rest of the world.

Third, Japan’s external position with the rest of the world is unambiguously healthy. It is the world’s largest creditor nation thanks to the persistent current account surpluses accumulated over decades arising largely from its strong manufacturing exports:

 

Japan has the third largest car industry, the largest electronic goods industry, and is ranked among the most innovative in the world by global patent filings.

Fourth, japan is a well functioning society with few beggars and homeless people.

Overall, for a small island nation with limited natural resources, Japan is killing it economically, embracing smart productivity-enhancing growth over dumb ponzi-driven growth. To cash-strapped Western nations, Japan should be viewed as an economic role model, not a failure.

We also shouldn’t forget that economists at MIT recently found that there is absolutely no relationship between population ageing and economic decline. To the contrary, population aging seems to have been associated with improvements in GDP per capita, thanks to increased automation:

ScreenHunter_18202 Mar. 26 13.24

If anything, countries experiencing more rapid aging have grown more in recent decades… we show that since the early 1990s or 2000s, the periods commonly viewed as the beginning of the adverse effects of aging in much of the advanced world, there is no negative association between aging and lower GDP per capita… on the contrary, the relationship is significantly positive in many specifications.

If Australia was truly a ‘clever’ country like Japan, it would manage population ageing by: 1) better utilising existing workers, given there is significant spare capacity in the labour market; and 2) where required resort to technological solutions.

The last thing that Australia should be doing is running a mass immigration program which, as noted many times by the PC, cannot provide a long-term solution to ageing, lowers wages, and places increasing strains on infrastructure, housing, the natural environment, and overall living standards.

[email protected]

Comments

  1. an unemployment rate that Australian workers could only dream of

    Aussie job hunters and Aussies looking for a promotion.

    Also consider the inflation lie peddled by users of 457 visas. “inflation will go through the roof if we hire Aussies instead of 3rd world males”.

    What is the inflation rate in Japan?

    In Australia, 3G data is way cheaper than it was in 2004. Solar panels are cheaper than ever. But no, 3rd world males must continue to be imported due to “wage inflation”.

    Why not tame “inflation” by raising interest rates instead – like Paul Volcker did?

  2. Japan is real trouble… that title is an exercise fiction – have you seen the debt its accumulated, the government now owns a sizeable of the share-market… cannot afford pension payments, health costs, etc, etc, and country is about to fall of a cliff!!!

    And yet its held as some kind of paradigm of virtue????

    • government now owns a sizeable of the share-market

      Trust you to say government ownership is a bad thing…must be why Howard privatised everything. Unfortunately the ALP wanted to privatise the NBN! So, both parties are cut from the same cloth.

      • NBN is a dog – we spent the entire mining boom (and then some) on a white elephant, yesterdays technology.

        Sell it? Great idea… but who would buy?

      • who wouldn’t buy NBN, old technology, sure but ultimate monopoly and highest internet prices in the world

      • There is logic in that Monopoly idea – Telstra gets $3bn pa to put its copper network on hold – a cost for 20 years that everyone conveniently ignores when they quote NBN costs…

    • Have you been there RT? The society is far more cohesive than ours, people look after each other and look out for each other. UE’s observations are spot on. It will be a better country with fewer people. Space is still an issue there. Older workers, and citizens are valued, work is considered important.

      • Not unlike China? It borrows from itself! The problem is, the pension funds want those Japanese borrowings back to pay old people so they can buy food and stuff… and guess what, there is nothing left but a lot of bad debt!

        Remember, Japans working population peaked in 1989, and bad things started happening, the pace of which, is accelerating. It is a salient lesson on not how to run a country population wise.

        China’s working population peaks this year! Guess what???

      • This debt with the government on one side of the ledger, and the Japanese public on the other poses no real problem, its only accounting. The Japanese have worked out that money isn’t a scarce resource, you can print as much as you want so long as inflation stays low. Its a very interesting MMT experiment and based on results so far wrt actual tangible outcomes i.e. health, employment, quality of life, technological advancement, seems to be working.

      • Seriously Disagree – thats a generic blasé statement, and I don’t think you realise how international finance works; money is fiat, and if people lose faith that its a store of money, then its useless. To keep the faith, especially among other counterparts (countries, global banks) rules and strict accounting has to be applied. If not… Bitcoin suddenly becomes interesting, as an alternative store of wealth.

        Its not accounting, its real money. The reason why the divorce bill for Brexit is so large, is all those Trillions the ECB has been buying of Italian bonds and the like, stimulating that dead corpse, has to be repaid. Its real money. Thats what has shocked the British political elites, they hoped they could hop out of fiscal union, and thereby ignore monies spent (in their name) to date. The ECB, by the way, is about to stop Italian bond buying – have a look what will happen to yields at the end of this year…

        That $4Tn that the Fed spent, is now being withdrawn. It may have been created, but it is soon going to be realised with withdrawing current money from circulation. Countries are no different than you or I. They borrow, and they have to repay…

    • We’ve been hearing that Japan is about to run out of money for 20 years… And that borrowing would get horribly expensive for them – whereas in reality they were able to force the bond rate down to zero…

      Japan is a good case that Modern Monetary Theory is onto something. Being a currency issuer (like Japan) means they can theoretically keep this up for ever, unlike a country that uses a foreign currency (e.g. Greece etc.) or one with a fixed exchange rate (e.g. Venezuela), as long as they don’t do anything that crashes output (like Zimbabwe or Venezuela did) and don’t spend so much that aggregate demand outstrips output (which is when you get inflation).

    • Lipstick on a pig, ignoring future population trends and their impact on Japanese economy and society eg. increasing number of elderly Japanese in poverty, getting gaol time and dominating the prison population; Japan does have significant immigration that flies under the public radar.

    • The article is contradictory. Demolish houses every 30 years because of a shrinking population?

      Japan has not had a shrinking population for 30 years but 10 years at the most.

      Could someone do an article or a documentary on how old Aussie houses have been converted into dental clinics?

      • That isn’t the reason given in the article for the short housing life cycle. Rather, the article claims the following factors:

        – New houses were built very poorly after WWII
        – Since around the same time there have been repeated code revisions, rendering the houses prior to each code virtually worthless.
        – The above factor discincentivised maintenance, compounding the effect of the first two factors

    • Mining BoganMEMBER

      I’ve been watching the four townhouses being built a few doors down from me. ‘Luxur townhouses’ they are apparently. They’ll be lucky to stand up for thirty years.

      We’re already there.

  3. If only the Japanese had been successful in taking Australia in the 1940s. To think of the waste in terms of money and lives Australia spent repelling the Japanese only to then end up as a third world Asian nation anyway, rather than an advanced one, just 7 decades later.

    • Notwithstanding my comment above, I am glad I am an Australian. Japan has changed for the better since WW2, however the society is still more constrained than what we are used to. There is no cultural enrichment imported and it is a much better place for it. Something the west could learn.

  4. Japan has many admirable qualities and it is my favourite country to visit (here it comes) but it’s continued success is built upon unreasonable demands put upon its youth. That was the common reason for Japanese people I know in Australia to move here. Relentless 60+ hour weeks with no opportunity for a life. They still outwork myself and most people I know here, but they aren’t been chewed up.
    Obviously, the above isn’t a rebuttal of the whole post, but it is a consideration that is often overlooked when looking at Japan. Our youth suffer from too much population growth, theirs suffer from too little.

    • Most people in Sydney work 40 ish hours a week. Add in travel time and that blows it out to 50 plus hours even paying F ing tolls.💩

      • Do it this way then –

        Increase in foreign residents plus existing foreign residents who died = NOM – With a death rate of 10 per 1000 that’s an extra 20k, so imputed Japanese NOM is approximately 180k.
        Compare to Australian NOM of 210k (which definitely includes students who stay for more than 12 months) for year ending December 2016.

        Besides, they’re not increasing the numbers of foreign students just to send them home again.

        https://www.bloomberg.com/news/articles/2017-05-24/japan-opens-new-front-in-race-for-booming-southeast-asia-markets

      • I did not think that the NOM in Australia reflected the increase in residents in Australia. The Japanese figures quoted definitely do. I note that in 2015 there were 645,185 international students in Australia which I presumed were not counted in the NOM, otherwise they would not be “international.” The nationalities are noted. I note there were 453,532 in 2014, an increase of 10% on the previous year.
        https://internationaleducation.gov.au/research/Research-Snapshots/Documents/International%20Student%20Numbers%202014.pdf
        https://www.studiesinaustralia.com/studying-in-australia/why-study-in-australia/international-students-in-australia#1
        There was an extra 190,000 in that year alone. I do not think that this is taken into account in NOM, but I could be wrong.


      • I note that in 2015 there were 645,185 international students in Australia which I presumed were not counted in the NOM, otherwise they would not be “international.”

        There is no basis for that assumption.
        NOM is calculated very simply on the 12/16 rule, and includes any international students (those doing courses that go for greater than 12 months) that it applies to. It also includes other short term migrants such as 457s – again as long as they meet the ’12/16′ requirements’.

        Here is the definition, which gives no basis for excluding students who otherwise meet its requirements:

        “Conceptually, the term NOM is based on an international traveller’s duration of stay being in or out of Australia for 12 months or more. It is the difference between:
        the number of incoming travellers who stay in Australia for 12 months or more, who are not currently counted within the population, and are then added to the population (NOM arrivals); and
        the number of outgoing travellers who leave Australia for 12 months or more, who are currently counted in the population, and are then subtracted from the population (NOM departures).
        With the introduction of the ’12/16 month rule’ methodology for estimating NOM this 12 months does not have to be continuous and is measured over a 16 month reference period. For example, whether a traveller is in, or out of, the population is determined by their exact duration of stay in Australia over the subsequent 16 months after arrival or departure.”

        http://bit.ly/2jToSxe

        In the meantime, the number of international enrolments has limited utility in respect of resident population, as it includes students enrolled in courses with less than 12 months duration who may not be in the country concurrently. This seems especially likely for ELICOS, which is around 25% of enrolments. An IELTS prep course looks like it takes about 20 weeks, for example.

      • This has gotten a bit complicated. Let’s simplify it.
        In 2016, the number of foreign born residents in Australia was 6,873,050. In 2015, it was 6,710,540.
        That is, in the 12 month period when Japan increased its foreign born residents by 160k, Australia increased its foreign born residents by 162k.

  5. FiftiesFibroShack

    They essentially have a guaranteed employment program going on, even if it’s just putting an oldie on a crossing. I’d like to see a work guarantee here in Oz, in preference to UBI.

    Yep, a lot to like about Japan, although, their growth is largely the result of stimulus and doesn’t seem like the ideal model.

  6. I’m currently in Japan. Would move here if I could. Costs of living lower than Australia. Who needs a train timetable when there minimal waiting times.

    Pedestrians and bike riders know how to share the footpath, drivers are not aggressive, people stand out of the way to let everyone of the train before getting on.

    I’m seriously thinking inn next to start learning some Japanese and then see if I can get some work here. Seems plenty of westerners working here, at least in Tokyo.

    One day we had trouble finding yoyogi station and a more old lady walked us all the way to the station, all the while using her linked English to have a chat with us. Last trip has similar with an old man out for his walk happy to guide us to the station. Not sure Australians would bother helping a local, let alone a tourist, in a similar way.

    Cultural homogeneity has far more strength than the cultural colonialism diversity we seem to have in Australia

    • I’m seriously thinking inn next to start learning some Japanese and then see if I can get some work here. Seems plenty of westerners working here, at least in Tokyo.

      Now there’s some weapons-grade irony.

      Best of luck. The Japanese are even less tolerant of foreigners than you are.

      • Not so smithy. I was there twice this year and am frequently there. Nothing is ironic about what Sydboy says. Go there and see for yourself.

      • Not so smithy. I was there twice this year and am frequently there. Nothing is ironic about what Sydboy says. Go there and see for yourself.

        I’ve been. Several times. I also know people who have lived and worked there for 10+ years, including marrying Japanese spouses.

        The Japanese are very polite, but they are ambivalent (at best) towards foreigners. This is hardly a controversial suggestion to anyone with even a passing familiarity to their culture and history. I doubt you would find many Japanese who would argue that they do not have an insular, to the point of xenophobic, society, with a colourful past of militaristic nationalism.

        The ironic part is that he is considering acting in the same way, and to produce the same outcome, that he complains about here.

        Hmm. You might have a point. Maybe “hypocrisy” is a better word than “irony”.

  7. Just the sort of article I subscribe for. Here, as in many other articles, Macrobusiness does a great job debunking the lies and propaganda spooned into us by the mass media.

  8. LVO – a very good and timely piece.- quality of life factors further add to Japan’s performance
    Japan’s technology investments to counter ageing will serve it very well long term

  9. loll so how is MB going to explain Japans low wage growth and deflation if their immigration rates are a polar opposite to Australia. Good strategy though – blame tech and automation related world trends on immigrants (read non-Europeans), wage growth being the latest weapon to beat people who look different to you with

    https://asia.nikkei.com/Politics-Economy/Economy/Japan-s-wage-growth-weak-for-second-year-in-a-row

    ‘In addition to having an unemployment rate that Australian workers could only dream of’

    Are you for real? so what is the Australian unemployment rate to you

  10. The GDP per capita change graph sources from the OECD if not irrelevent is a flawed data presentation. Australian uses the UN definition of NOM which inflated population through counting eg. students on temporary visas; comparing apples with oranges when others use the OECD definition that excludes students.