In our 2014 Capital Markets Forecast, we closed the article “Demographic Trends: Implications for Investors” by stating that “rapidly aging populations such as Japan face a notable headwind as a higher share of the population enters retirement.”
As the recent Bloomberg article “Japan’s Population Shrinks for the Third Year As Ranks of Aged Grow” acknowledges, some of these headwinds are coming into play now, earlier than some expected.
In an effort to counter this aging effect, Japan has enacted unusual and sometimes-extreme social measures such as hosting “matchmaking parties” and robot babies, along with more prosaic efforts such as facilitating day care for children to entice more women into the labor market. However, these measures are likely too little, too late to reverse the slide in population.
Immigration may be the only realistic option to address population decline. This would result in a significant change to Japanese society and its current “closed door” policies.
In the near term, significant measures to reflate the Japanese economy may continue to be positive for the country’s stock market and may push the Yen further down. However, fundamental reform such as deregulation and tariff reform are also necessary for a sustained Japanese recovery.
If the rapid aging of the population is not addressed, the long-term implications for the country’s economy are significant and potentially dire.
While Japan is an extreme example, with a population that is literally shrinking, its demographic challenges are shared throughout the developed world and in China. Thus the Japanese experience may be a preview of the challenges other countries will face not far in the future.