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Crisis Focus
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UPDATED: March 26, 2010 NO. 13 APRIL 1, 2010
Too Old To Grow
 
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Recent economic figures show the Japanese economy is declining—its nominal GDP fell 6 percent in 2009 to $5.85 trillion, even below the level of 1992 when its real estate market started to collapse. In a recent article in Century Weekly magazine, Andy Xie, a renowned independent economist, blamed the Japanese downturn on an aging population, a problem also shared by many other countries. Edited excerpts follow:

Japan's economic woes defy any quick stimulus measures or structural reforms as the aging population problem drains life out of the economy.

Indeed, like many other developed countries, the Japanese society is growing old. Meanwhile, a protracted drop in an already low birth rate made an additional dent on the labor force, though it allowed more women to enter the work force in the first place.

By pushing into capital-intensive sectors, Japan cushioned the impact of labor shortages. But the capital deposits have obviously increased to a point where investments are no longer as powerful a driving force for the economy as they were previously.

Side effects from the aging population are increasingly being felt. The Japanese Government has had to dig deeper into its pockets to provide benefits for pensioners. Meanwhile, Japan's youth will have to cope with heavier tax burdens and less pay—an impediment to productivity. Worse still, the elderly are less creative and bold, making it difficult to push through social and economic reforms.

The impact of the problem is filtering through every aspect of the economy. Japan's real estate sector, for instance, is faltering on sluggish demands as the population decreases. In the past two decades, house prices have plunged 7 percent on a yearly basis. The stock market has experienced a bearish trend as listed companies suffered from stagnation in profit growth. Tokyo looks no less vibrant than other global metropolises. Much of the capital city's vitality is owed to young migrants from second-tier cities.

So is it possible to hold back or even reverse the current aging trend? Probably not.

Bringing in migrants sounds helpful, but is definitely not a viable solution. Economists believe the only hope lies in the Total Factor Productivity (TFP), a measure of efficiency in use of inputs. Higher TFP means greater productivity and innovation, which enables aged economies to regain their growth momentum.

The rest of the world now shares Japan's problems. Major European economies, for example, are now mired by their aging society. With their revenues subdued, governments there are taking up debts to cover generous social benefits pledged in past boom times. The EU's average annual deficits now account for 6 percent of its aggregate GDP, while the ratio for the United States stands at 10 percent.

Developing countries, such as China and India, are catching up. China, in particular, faces a higher risk as its one-child policy beefs up the aging process.

In the long run, aging populations will continue to mount financial pressure on governments all over the world. Once they fail to fulfill the benefit pledges, the consequences will be serious.

 



 
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