Abenomics can clear Japan's demographic hurdle
By Andy Mukherjee
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Japan has a serious demographic disadvantage: its population is both shrinking and ageing. But the situation is not so dismal – at least not yet – that it will wreck Prime Minister Shinzo Abe's plans to revive the economy.
The population of Japanese workers aged between 15 and 64 has contracted by 6 percent in the past decade. Over the next quarter century, the fall may be steeper, according to projections by Tokyo's National Institute of Population and Social Security Research. But even if it shrinks by 13 percent, or 10 million people, over the next decade, Japan still has the potential for annual GDP growth of 1.5 percent, according to a Reuters Breakingviews calculator. That's double its actual growth rate over the past 18 years.
A country's growth potential is partly determined by the number of additional labour hours that go into producing more output: in short, the expansion in employment. Other factors also play an important role: whether workers have better skills, and access to more capital and superior technology.
Even then, however, growth can fall behind its potential due to deficient demand. That's the case in deflationary Japan: people have postponed spending because they expect things to cost less in future.
Abe's big bet is that boosting demand will not only end deflation, but lift the supply side of the economy too. Aggressive fiscal and monetary easing, designed to create a virtuous cycle in which companies invest more and create new, better-paying jobs, should draw more people into the workforce. But given Japan's poor demographics and its aversion to immigration, are there any people left to do the work?
To answer the question, start with working women. Female participation in Japan's workforce is currently 63 percent, among the lowest in the developed world. If Abe's policy supports working mothers, for instance with state-funded kindergartens, that figure should rise. Cultural restrictions will still make it hard for Japan to emulate Sweden, where eight in 10 women of working age have a job or are looking for one. But an increase in the participation rate to 70 percent looks achievable.
It won't be as easy for men. Already 84 out of 100 working-age Japanese men are employed or looking for work. Some countries do better: in Switzerland, the male participation rate is 89 percent. But if Abenomics is successful, some Japanese men might choose to work less. A slight increase to 85 percent appears a reasonable forecast.
Then there are the elderly. Lifting the retirement age above 65 years would induce them to work for longer. The return of inflation, which devalues retirement savings, could also prove a powerful incentive to keep earning. The example of Finland – where 34 percent of elderly people are workers or jobseekers – may be too much for Japan to emulate. Still, it's not unreasonable to think that proportion of over-65s in the workforce will rise from 20 percent to 22 percent over the next decade.
Finally, Abenomics could squeeze unemployment. This is not a huge problem in Japan – despite years of sub-par growth, the jobless rate was still just 4.3 percent at the end of last year. Even so, improved economic prospects should lower this to 3 percent.
Drawing more people into the workforce won't entirely offset the demographic decline: the calculator's central scenario suggests total employment in Japan will shrink to 61.15 million in 2022, from 62.73 million today – a reduction of 0.25 percent a year. However, that's better than the 1 percent shrinkage that would be likely to occur if the proportion of working men, women, elderly and unemployed remains unchanged.
How, then, can Japan grow? That's depends in part on the factors that make workers more or less productive: skills, capital and technology. Though Japanese workers are already well educated, labour quality has improved by 0.45 percent annually in recent years. Assume that continues.
In a developed economy like Japan, it's unreasonable to expect huge growth in capital per worker. But the 1 percent annual increase between 2000 and 2006, the latest period for which data is available, can be expected to persist.
Finally, there's technological progress. Japan's record on improving total factor productivity has been a paltry 0.4 percent a year. A better performance is possible if a weak yen prompts Japan's electronics and auto exporters to spend more on research.
But even if productivity improvements remain sluggish, the combination of these factors should make it possible for Japan's economy to expand by 1.5 percent a year for the next decade. While the country's demographics are a drag on the revival promised by Abenomics, they should not be an insurmountable obstacle.
Goay Joe Lie
No comments:
Post a Comment