Japan has the world's second biggest economy after the US. But there is a problem: not only is its population ageing, but soon there will be fewer Japanese than there are today - about 30 million fewer in 50 years' time, based on current trends.
What will this mean? For a start, it explains why Japan's economic recovery is fragile - and don't expect the country's real estate market to have good long-term prospects. Japan can look forward to plenty of empty flats and houses; property prices have already declined to about 1970s levels.
Japan's population is now about 127 million: the Institute of Population and Social Security Research forecasts that it will fall to somewhere between 92 million and 108 million by 2050, and the UN estimates that it will decline to 105 million.
Having only just enacted a new pension scheme, which assumed a fertility rate of 1.39, the Japanese government discovered in 2004 that fertility rates were falling even faster than had been predicted, dropping from 1.32 babies per woman in 2002 to 1.29 in 2004. With a population that's both ageing and shrinking, Japan's economy can hardly be expected to grow in a sustained way. Indeed, growth for the quarter to September 2006 had to be revised down from 0.5% to 0.2%, giving an annualised growth rate of just 0.8%.
So, what is the long-term solution? Certainly not another round of tax cuts, or more spending on construction or another loosening of monetary policy. Japan doesn't have enough young people forming families and new households, with all the spending that goes with it, to sustain growth in domestic demand. About 25.5 million people are aged 65 or over - that's 20% of the population - and the number of over-65s is growing by about a million a year. With just 18 million people aged under 15, there are now more people in Japan aged over 65 than under 15 - the only mature economy in the world where this is the case.
It doesn't matter how cheap the cost of borrowing is - the typical 80-year old simply is not going to start a new business. Older people, and those facing retirement, have spent their lives acquiring all the goods they need and are now more concerned with looking after their savings. And those savings amount to a very large pool - the average savings balance of elderly Japanese households is a whopping Yen25.3 million ($210,385), more than 50% higher than for all other households. Loosening these purse strings would go a long way to reviving economic growth.
Not only is the higher spending base of Japan's population shrinking as a proportion of the total, but so too is the number of wage and salary-earning taxpayers. In 1950, there were 12.06 Japanese of working age (15-64) per person aged 65 or older. By 2000, there were just 3.99; by 2050, the figure will be only 1.71. This is happening so fast that the next generation of Japanese will face a net increase in lifetime taxes of 170% on that paid by the current generation, assuming that the elderly receive the same government benefits as they do today.
What's the answer? Ordinarily, it would be to boost immigration. UN demographers have calculated that just to stabilise Japan's population, it would need to admit 17 million immigrants by 2050, representing 18% of Japan's then population. But is a massive boost such as this likely? Currently, Japan accepts almost no migrants and can barely bring itself to take in refugees. It might be generous with foreign aid to help refugees, but that's so long as they settle elsewhere.
Consequently, Japanese society is one of the most homogeneous in the world. An astounding 99.4% of Japan's population is ethnically Japanese (this figure includes the indigenous Ainu people). The other 0.6% are almost entirely ethnic Korean and Chinese. Only the Koreans are accepted to any great degree and then only grudgingly. Masayoshi Son, founder of telecommunications and media group SoftBank and one of Japan's richest men, is perhaps the best known.
Since a significant uplift in immigration is unlikely, the reality is that Japan's population will shrink. However, even if the economy contracts as a result, it probably won't contract at as fast a rate as the population - individually, the Japanese will grow even richer and the country will remain a very wealthy consumer market indeed.
THE IMPLICATIONS OF AN AGEING, SHRINKING POPULATION
- The huge emphasis that past Liberal Democrat Party governments have placed on construction means that Japan is over-built: there are too many bridges, highways, conference facilities and exhibition centres. The price for the use of such facilities can only grow cheaper as Japan's population shrinks and its working age population shrinks even more. Japan will become more competitive as an international venue for conferences and conventions. There will be an upswing in international tourism too as on-ground costs decline.
- Real estate as an investment might look superficially attractive - prices are now low compared with the boom times of the 1980s - but with a declining population the long-term potential for capital gain is limited, especially when compared with other markets. The wisdom of foreign pension funds such as Singapore's GIC buying up big in Japanese property needs to be questioned.
- Industries that relate to the elderly will be one of the few growth sectors in Japan. Healthcare, pets, dietary supplements, retirement homes, leisure activities for the elderly and international travel can all expect further growth. Managing private savings is a huge business and will only get bigger.
- Sectors that relate to young people will contract. Japanese companies that produce products that appeal to the young will need to establish themselves overseas to expand. So, increasingly, more Japanese youth brands, such as the ultra-trendy youth clothing label Bathing Ape, will open outlets outside Japan; for instance, Bathing Ape recently established branches in London, New York and Los Angeles.
- Don't write Japan off as an export destination, particularly for high-end consumer goods. National income may not grow much more and it might even decline, but GDP per capita will rise. There will be fewer but richer Japanese in what is already a fabulously rich consumer market.