The Economic Effects of Ageing Population Comparing Japan with European Countries.
Introduction.
Since 1970, when Japan’s aging population was first realized, its rapid economic development tends to be the driving factor. From a plethora of literature, my opinion towards this effect is that ageing population does and will continue to pose pervasive impacts regardless of the economic development or the extent of the Japanese government intervention or support that it has in place. An Ageing population is an experience that is not only being felt in Japan but in most countries globally. The difference is the rate of population growth, with statistics showing that developed countries have a higher number of the aging population compared to the developing countries (Higo & Khan, 2015). This also tends to describe a similar experience among European countries such as Belgium, France, Portugal, Poland, Italy, Spain, United Kingdom, Russia, and others. Fundamentally, studies reveal that the larger the population of the elderly, the higher the fiscal burden as well as the transfer of income between generations. Drawn from readings, my opinion concurs with researchers who put forth that a shrinking workforce, and a falling saving ratio, directly and indirectly, lower the economic growth of a nation.
However, I tend to believe that despite the available methods of offsetting the impacts of the aging population such as through stimulation of the older persons back into the workforce and efforts of mobilizing savings showing the likelihood of solving the problem, they tend to be mostly short-term solutions that in the long-run, such countries will have to deal with issues of hiring of labor or dependence on immigrations. In my opinion, even though additional labor from retirees will do contribute in raising the particular country’s economic activities’ growth potential as well as have a positive impact on the fiscal balance, much more has to be put in place in terms of policies that will promote conservations and better utilization of human resources. These efforts could majorly be long-term to lower the current and future burden arising from the aging populations. Even though governments may seem to have little to do as to mobilize savings unless it engages in savings itself and also experiences the difficulty of controlling human resources in the nation, considering the move to lower the distortionary features of the public pension systems, which tend to promote early retirements among workers of these countries, lie as one practical solution I believe could aid in resolving the issue. This paper examines the economic effects of the aging population in comparing the Republic of Japan with the European countries. In so doing, the article explores the impacts of analogies, similarities, differences, and contradictions on both Japan and European countries’ business or economics.
The Impact of the Population Structure On Japan’s Economic Stability.
Among the developed countries globally, Japan stands out as the most hit with the highest number of the aging population. The country’s current estimation reveals that 33% of its population is aged above 60 years of age and 29.8% is over 65 years old and about 12.6% over 75 years of age. This stands out as the highest proportion in the world. With such a trend, the country’s estimation in 20130 shows that in every three Japanese, one would be older than 65 years. Researchers link the country’s rise of the aging population with the family and social structures the Japanese hold and the high rate of economic growth since the post-war period (Clark, Ogawa, Kondo, & Matsukura, 2010). The changed family and social structures among the Japanese explain the decline in the country’s current low fertility rate. This has been attributed to changing lifestyles, the economic insecurity of younger generations, and individuals not marrying or marrying later in their lives. One extra driving force of an increased rate of elderly people in Japan is the increased life expectancy, which stood at 72 years five decades ago, and currently at 84 years (Adair, Kippen, Naghavi, & Lopez, 2019). Japan’s population from 1920 to 2010, with population projections out to 2060, could be represented as below.
Therefore, the entire aspect of the aging trend in Japan affects its economic performances through the rise of the social security burden and benefits and the reduction of the workforce that stands out as a critical factor of production. The IMF termed the two as the leading factors that hamper the country’s economic growth (Yoshino, Kim, & Sirivunnabood, 2019). According to the IMF, the Japanese’s aging structure stands to drag its average annual GDP growth by 1% for the next thirty years. Following this challenge, the country’s policymakers, since April 2019, have in place the idea of permitting foreign workers, though in a controlled manner, to cover up the labor shortages. Despite this showing to be a potential solution, it has challenges in being assessed easily, given the conservative nature of the country to follow its 2019 immigration act amendment. The country is considering a retirement age of 77 years in a move to maintain the retiree-to-worker ratio. In attempts to grow its workforce economy, the Japanese government has put in place support systems that could encourage young couples to find the ease of raising children. One of the ways is by allowing pre-school education free. Though the administration of Prime Minister Shinzo Abe targets to raise the country’s fertility rate to 1.8 by the year 2025, it stands more likely that this would be a hard target to be achieved very soon, given that in 2017, the country had a fertility rate of 1.43. (Yoshino, Kim, & Sirivunnabood, 2019).
In an attempt to lower the estimated increase in the aging population from 33% to 38% by 2050, the Japanese administration will have to pursue structural and labor reforms that will increase the country’s productivity despite its declining workforce. To ease the economic burden associated with the aging trend, the Japanese government should consider having women play critical roles in the labor market as well as elderly people. The underlying aim is to have labor productivity and a benefit with savings in healthcare costs, given that promoting healthy living of the elderly also increases the savings rates, increases foreign direct investments, and lowers aggregate medical expenses. Perhaps, all these will only be made possible when the older citizens of the country would be considered senior citizens and encouraged to live healthily and keep producing.
Despite the country’s aging trend proving an adverse effect on its macroeconomic status, macroeconomically, some large corporations such as Lawson’s Incorporation, which is a Japanese convenience store chain, stands to be profiting from the trend. Large Corporations such as the Lawson’s are now benefiting from majoring in senior citizen’s salons featuring adult diapers, wipes, straw cups, strong detergent for removing urine on bed mats, and gargling basins (Muto, Oda, & Sudo, 2016). This is because such products are being purchased mote by the elderly as opposed to young children. In Japan, less desirable industries, such as construction and agriculture, are more threatened compared to others. This follows statistics that the average farmer in Japan is 70 years old and that about one-third of workers in the construction industry are over 55 years old, with only one out of ten people in the industry younger than 30 years old (Katagiri, 2018).
The Impact of the Population Structure On European Countries’ Economic Stability.
On the side of European Countries, the European population is also on the verge of getting old. According to the International Monetary Fund, Europe’s already ageing populations is about to cause a brusque productivity slowdown that will eventually result in economic challenges (De Vroom & Øverbye, 2017). Like Japan, the ageing population will swell, affecting the retirement age of the workers, which would result in a productivity drop. According to De Vroom & Øverbye (2017), the ageing trend stands to hit hard among the European countries, given their historical productivity standards that have mainly stagnated. Countries like Italy and Greece have a history of significant economic issues, one being the weak economic productivity growth that has stagnated them. The IMF estimates a one-third increase of the European labor force aged 55 to 65 years from 15 percent to 20 percent in the next two decades. There exist two fundamental theories behind productivity and ageing trend that stand to affect the European countries’ population. Firstly, a country posing to have a majority of its workforce having accumulated years of working experience stands to benefit from older workers’ productivity. Conversely, the second theory stipulates that such a country would likely have their productivity under siege as frailer health and obsolete skills stand to lower productivity, at least past a certain level (Barr, 2020). However, most works of literature reveal that when productivity increases with age mostly occur between the 40s and 50s, productivity begins to diminish
Therefore, ageing workforce stands to cause a big issue on productivity growth. Chart 2 above, retrieved from IMF Direct, an average productivity growth among the European countries is forecasted at about 0.8% annually. This rate could go up by a quarter, i.e., to 1% if the entire effect of the ageing population among the European countries is shut down. According to the IMF, the weak European nations stand to be unevenly distributed with these productivity slumps compared to stronger European nations. As revealed by the chart above, the burden of the ageing workforce stands to fall unequally across the states. Greece, Spain, Portugal, and Italy stand to be highly and adversely affected by the fall of workforce productivity, given that these countries have elevated debt levels and meager fiscal space. This puts them at a higher need for rapid productivity growth to build competitiveness and lower the rate of unemployment.
For example, Belgium predicted that its population would increase by 5% by 2050, mainly due to immigration, longer life expectancy, and higher infertility rate, The SCA estimates an increase of 63% of the elderly population to over 25% of Belgium’s total population (Jakovljevic et al., 2018). This also puts Belgium on the high-risk end just like Japan. The economic cost of the aging Belgium population could be realized by analyzing the Belgian government’s spending of 9.1% of its Gross Domestic Product on Pensions and 7.1% on health care expenses back in the years 2005, with an estimated 5.8% increase by 2050 under an assumption of no alteration in the retirement age. Just like other European nations, most spending is incurred through social security such as pension and health care with most European countries posing the high likelihood of the rising costs, given the rising aging population. Belgium’s social spending is estimated to rise from 3.9% to 13.0% of the country’s GDP (Lee & Mason, 2017).
In 2017, Belgium’s population of those over 60 years hit 24.6 percent, with a projected increase to 32.4%. For Germany, the population of its over 60 years’ citizens stands at 28.0%, with an anticipated increase to 37.6% by 2050. On the other hand, Italy suggests more ageing rates than other European Nations (Mazzola et al., 2016). This puts the country at a more economic risk that might call for an increase of its citizen’s retirement age to 77 years or admission of 2.2 million immigrants to offset the workforce ratio between retirees and productive workers. The country stands with a population of 29.4 %, constituting those over 60 years with an estimated growth to 40.3% by the years 2050. With minimal differences, the same trend extends to other European nations, including Spain, Portugal, Poland, the UK, Russia, and others (He, Goodkind, & Kowal, 2016). The underlying economic effects these countries suffer from as a result of an increasingly ageing population correspond to aspects of healthcare and social security costs and the country macroeconomic labor force decline that result in a higher fiscal burden to the nation at large. The ramifications for the economy rely on how both labor demand and labor supply and respond to this structural change in the working population. Regarding savings, as the individuals hit retirement, they start to siphon on the investments made for their support. Simultaneously, the decline in the size of the workforce may lead to lower saving thresholds. Thus, changes to capital markets may be expected. Reiteratively, even if the growth of an economy depends on various aspects, population ageing impacts economic growth through its potential effects on investment, savings, in the stock of capital and labor.
Similarities Between Japan and the European Countries.
Both Japan and the European nations pose similarities in terms of an ageing society. In both, it’s widely accepted that fewer people are working and that bot experience consumption behaviors that affect their economic growth. The countries stand to have more worries on aspects of aggregate savings and investments, given that with a rising number of elderly people raises the expenditure levels in terms of healthcare, social security, and consumption (elderly care products). Fundamentally, both the European countries and Japan have affected adversely with the age demographic effect. Economic researchers posit that the similarity between Japan and the European nations could have been mainly brought about by what they call “Japanification” of Europe or the Euro Zone. This has been the case through consideration of the factors revolving indicators that include mainly demographic change. Others constitute inflation, investments, short-term interest rates, inflation, saving, and economic growth. The Japanification process said to have begun after the global financial crisis. With these views, it means that Europe is the productivity move that resembles and follows Japan’s with many European countries struggling with high inflation rates similar to what the Japanese administration reported only to link it with the effect of the ageing population (Doling, 2018). Perhaps, this explains similar reactions among the European countries.
Both the European nations and Japan face similar workforce challenges that are calling the respective governments to consider controlled immigration as a solution to keep up with their productivity. Economically, the countries’ expenditure on healthcare and social securities is increasing and, coupled with reduced workforce productivity, stands to stagnate their rate of development. Similar to Japan, the European nations are rapidly experiencing shock in terms of the demand structure that have resulted in causing deflationary pressures, rise in unemployment rates, decreases in real GDP, decrease in tax bases, increases in government expenditure, and decrease in economic activities due to the aging population. Also, both Japan and European countries suffer from the aging population due to urbanization, increasing life expectancy, varying economics and culture, and changes in family and social structures since the post-war period, education and career, and individual attitudes.
Differences Between Japan and the European Nations.
Despite Japan and the European countries being on the verge of population aging, they pose differences in this system that could be called Japanification. Firstly, the rate of Japanese elderly people beyond the age of 65 is the highest, thus the most economically hit than any European country. Though most European countries exhibit the same growth, Italy is the only one with the closest rate of 29.4%, while Japan holds a record of 33% (Mazzola et al., 2016). Japan’s working-age population with respect to its total population between 1950 and 2050, according to the United Nations 2017 world population prospects, could be represented as below.
Despite the high number of the ageing population in both Japan and the majority of European countries, Japan’s economy stands to be highly affected by the culture of overworking (working for many hours) compared to the Europeans’ culture (Banās, 2018). Thus has made the country maintain higher productivity despite the ageing population putting the country in the third position in terms of the economic size. As opposed to the majority of the European nations, about 40% of Japan’s workforce is non-regular, constituting part-time and temporary workers (Teruyama, Goto, & Lechevalier, 2018). Japan’s debt level stands higher than the European nations with respect to the GDP. As such, Japan accounts for its debt at 250% of its GDP, while the majority of the European nations range within the 86% mark. Compared to the eurozone countries, Japan has a more significant ratio of its debts include owned social security system assesses that account for about half of the GDP. If the social security assets are excluded, Japan could be seen with a debt situation substantially than other OECD and the general European countries. Compared with other European countries, Japan’s government stands to be the highly funding government to its citizens’ social security kitty, estimated around 25% (He, Goodkind, & Kowal, 2016). Economically, an increase in pension payment and health services costs for the elderly in the country directly impacts the country’s expenditure side, affecting its revenue prospects. This explains the country’s higher economic stagnation as a factor of its aging population.
Consumption Behavior.
In any ageing population, the elderly do play a critical role as driven by their different behaviors compared to those of the working persons. Therefore, if they represent a bigger section of the population, they pose a significant effect on the economy, given the change of household consumption structure that would largely affect the national demand structure (Nie, 2019). As mentioned earlier, through purchases of products such as adult diapers, wipes, straw cups, strong detergent for removing urine on bed mats, and gargling basins, stand to likely trigger substantial sectoral economic shifts. This could be through sectoral employment that will be closely prompted by the increase in production to meet the demand. However, following studies on the consumption rate at old ages, consumption would fall substantially when the majority of the population retires or ages. This is what the researchers call the “retirement-consumption puzzle” (Jinrui & Ruiling, 2019). According to Jinrui & Ruiling (2019), the reduction of consumption after retirement is a result of a lack of forward-looking behavior by households. The reduced physiological body requirement for foods due to old age, fewer resources’ requirement for old-age care, the substitution effect between consumption and increased leisure time, and end of work-related expenses explain the aggregate fall of consumption among the retirees. These could be much felt for a nation like Japan and other European nations that are currently recording higher rates of life expectancy (ageing population). The underlying or fundamental concern with the aspect of consumption is that strong life-cycle age-related components, as well as generation and time effect, affect consumption at the household level, which aggregate to affect the nation’s consumption behavior.
Conclusion.
In conclusion, as the demographics shift older, the working population shrinks. This transformation impacts a country’s labor market, long-term care, healthcare, pension systems, housing, transportation. It, therefore, remains a fact that other than environmental degradation, digitalization, and globalization, population ageing stands to significantly shape a country’s economic development, as has been demonstrated by the republic of Japan with a similar trend witnessed among the Euro Zone countries. Therefore, it calls for Japan and countries approaching the same bracket to consider measures that counterbalance life expectancy and decrease birth rates through high-level skills, effective policies, and more inclusive labor markets for high economic productivity. Despite the mostly examined threats of ageing population explored herein, it should be noted that there exist opportunities that come with age as well. This has proven true given the number of elderly people of over 60 years being involved in civic engagements and volunteering. In Europe, this could be witnessed by befriending, multi-generation projects, and third age universities. Tapping the opportunity of an aging population with the aim of employment participation will result in the growth of the “silver economy market.” The paper, therefore, recommends an active Ageing Index to be utilized by policymakers to examine the active and healthy ageing policies that will raise the country’s economy despite the very natural ageing process that no one including the government could do much to control.
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