Fiscal Reform in Japan

Week 3: Population ageing and its effects

on public finance

HIROKO OTA

1
 Outline
1. Demographic transition

2. Demographic change in Japan

3. Major impacts of population

decline on public finance
2
Trend and projection of world population
(hundred million)

109.3 hundred million

High estimate

medium

93.2 hundred million

60.5 hundred million

Low estimate
78.7 hundred million

25.1 hundred million

16.5 hundred million

⇒ projection

3
Source: United Nations (2001a)
Trend and projection of total fertility rates

⇒ projection
Africa
Latin America

Asia Developing area

World

Developed
area

4
Source: United Nations (2001a)
 Average annual rate of population change
- Trend and projection (1950-2100) -

Average annual rate of change (%)

Least developed
countries

Less developed
regions
World

More developed
regions

Source: United Nations (2013)

World Population Prospects: The 2012 Revision
5
Trend and projection of ageing ratio
⇒ projection

【ageing ratio】
the share of people aged 65 or over Developed area

World

Developing area

Least developed
country

6
Source: United Nations (2001a)
 Demographic transition
 First stage: prolific multi-death type
- improvement of hygiene, medical care
- decline of mortality

 Second stage: prolific small death type

- population explosion
- improvement of economic situation and literacy rate
- information about contraception

 Third stage: small production small death type

- stationary population
- ageing of population

7
 Population “bonus” and “onus”

Population bonus Population onus

First stage of Second stage of

ageing ageing
Decline of ratio of Retirement of
children working age group
↓ ↓
Increase of ratio of Increase of ratio of
working age group elderly group
↓ ↓
Push up economic Push down
growth economic growth
 （％）
Rapid ageing in Japan
40.0

35.0 【ageing ratio】

the share of people aged 65 or over
30.0 Japan
Germany

25.0 France
UK
US
20.0
China
Korea
15.0
（unit：％）

1970 1980 1990 2000 2010 2020 2030 2040 2050

10.0 Japan 7.0 9.0 11.9 17.2 22.7 28.4 30.3 33.8 35.6
Germany 13.6 15.6 15.0 16.3 20.8 23.1 28.2 31.8 32.7
France 12.9 14.0 14.1 16.0 16.8 20.3 23.2 25.4 25.5
5.0 UK 13.0 14.9 15.7 15.8 16.6 18.9 21.7 24.0 24.7
US 9.8 11.3 12.5 12.4 13.1 16.6 20.1 21.2 21.4
China 4.0 5.2 5.9 7.0 8.4 11.7 16.2 22.1 23.9
0.0 Korea 3.3 3.9 5.0 7.3 11.1 15.5 23.4 30.5 34.9
1970 1980 1990 2000 2010 2020 2030 2040 2050
Source：United Nations World Population Prospects ,the 2012 Revision
 （％）
Rapid ageing in Asian countries
40

35
Japan In almost all
UN definition Korea countries,
30
Singapore population
Above 21%: Super-aged Society will be aging
25 China by 2030.
20 Thailand
14～21%:Aged Society Vietnam
15
Indonesia
7～14%:Ageing
10
Society Malaysia
5 India 【ageing ratio】
Philippines the share of
0
1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050
people aged 65
or over
(unit:%)
1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050
Japan 4.9 5.7 7 9 11.9 17.2 23 28.6 30.7 34.5 36.6
Korea 2.9 3.7 3.3 3.9 5 7.3 11.1 15.5 23.4 30.5 34.9
Singapore 2.4 2 3.3 4.7 5.6 7.4 9.5 13.9 20.5 25.5 28.9
China 4.5 4 4 5.2 5.9 7 8.4 11.7 16.2 22.1 23.9
Thailand 3.2 3.3 3.4 3.6 4.6 6.9 8.9 13.8 19.5 25.9 30.4
Vietnam 4.2 4.4 4.8 4.9 5 5.6 6.5 8.2 12.9 17.9 23.1
Indonesia 4 3.6 3.3 3.6 3.8 4.6 5 6.3 9.2 12.7 15.8
Malaysia 5.1 3.4 3.3 3.6 3.6 3.8 4.8 6.9 9.7 12.5 16.5 Source：United Nations World
India 3.1 3 3.3 3.6 3.8 4.2 4.9 6.3 8.3 10.5 13.5 Population Prospects ,
Philippines 3.6 3.1 3 3.2 3.1 3.2 3.7 4.9 6.3 7.7 9.3 the 2012 Revision
Aging ratio of your country (2017)
Country Aging ratio (%)
India 5.99
Myanmar 5.73
Philippines 4.80
Uzbekistan 4.47
Cambodia 4.41
Maldives 4.12

11
 Total population of Asia (1)
Population (thousands)
Philippines 2050
157.1million

Japan (peak)2010
127.4million
Japan 2050
108.3million

Viet Nam 2050

103.7million
Thailand(peak)2025
67.9million Thailand 2050
61.7million

Korea2050
51.0million

Korea (peak)2035 Malaysia2050

52.4million 42.1million

Singapore2050
7.1million

Source: United Nations Population Division “World Population Prospects: the 2012 Revision”
12
 Total population of Asia (2)
Population (thousands)
India 2050
China (peak)2030 1,620million
1,453million

Source: United Nations Population Division “World Population Prospects: the 2012 Revision” 13
 “Population Bonus” in Asian countries
Population Bonus: increasing working-age population ratio
Population Onus: decreasing working-age population ratio
(age 15 and above but under60) / (total population)

1995

1930

2020

2020

2035

2045
1970
2045

1920 30 40 50 60 70 80 90 2000 10 20 30 40 50
(year）
Source: Cabinet Office

It is important for each country to push up per capita GDP before entering the onus stage.
 Two peaks of the
The population "bulge" Japanese
of the Dankai generation and Dankai Jr.population
generation
(10,000 people)
250
Dankai
Children Jr. generation
of baby boomers Dankai
Baby generation
boomer generation
(1971-1974）
composition ratio 6.2% (1947-1949)
composition ratio 5.3%
200 Composition rate 6.2% Composition rate 5.3%

Number of
150 employed
persons

100

50

0
0
12 4
16 8 12
20 24 16
28 20
32 2436 2840 3244 3648 4052 4456 48
60 5264 5668 6072 6476 6880 72
84 76
88 8092 84
(age in 2004)
【age in 2016】

Source: Annual Report on the Japanese Economy and Public Finance 2005, Cabinet Office
Notes: 1. Population Estimates and Population Census, Ministry of Internal Affairs and Communications. 15
2. The number of employed persons was calculated using the employment rate of each age group as of 2000.
 Japan’s population (rate of major three age groups)
Medium fertility (with medium mortality) variant
（％）
Total fertility rate
average number of children
one woman gives birth to
in her lifetime

Working age population(15-64)

Year Rate
1925 5.10
1940 4.11
Old-age population( 65 and above)
1950 3.65
1960 2.00
1970 2.13
1980 1.75
1990 1.54
Young-age population(under 15 )
2000 1.36
2010 1.39
2017 1.43

(year)

Source: National Institute of Population and Social Security Research 16

 Total fertility rate in Asian countries
replacement level: 2.08 (Japan)

China India Indonesia Japan Malaysia

1.60 2.44 2.45 1.41 2.11

Philippines Korea Singapore Thailand Vietnam

3.05 1.23 1.23 1.53 1.96

(Source) United Nations World Population Prospects: The 2017 Revision

Total fertility by major area, region and country, 1950-2100(live birth per woman)

17
 Life expectancy at birth (2016）
Top 10 countries
All Male Female
country years country years country years
Japan 84.2 Switzerland 81.2 Japan 87.1
Switzerland 83.3 Japan 81.1 France 85.7
Spain 83.1 Australia 81.0 Spain 85.7

Australia 82.9 Canada 80.9 Republic of Korea 85.6

France 82.9 Iceland 80.9 Switzerland 85.2

Singapore 82.9 Singapore 80.8 Singapore 85.0

Canada 82.8 Norway 80.6 Italy 84.9

Italy 82.8 Sweden 80.6 Australia 84.8

Republic of Korea 82.7 Italy 80.5 Canada 84.7

Norway 82.5 New Zealand 80.5 Luxemburg 84.6

Source: World Health Statistics 2018, WHO 18

 Major effects of
population decline

19
 Major effects of population decline
on public finance
1. Crisis of sustainability of
social security systems

2. Decline of labor force

→ negative effect on the economy
→ decline of tax revenue and tax payers

3. Decline of household savings

→ negative impact on issuing government bonds

20
Trend and estimate of number of people employed
(20 to 64 years old)
(10 thousand people)
4000
(estimate)
male
3500
3457
3000 3251
3139
2930
female
2500
2392 2395 2488 2447
2342
2000
1937
1500

1000

500

0
2000 2010 2017 2025 2040

Source: Ministry of Health, Labor and Welfare

 Solutions to overcome the decline of
the labor force
1. Increase of participation rate in labor market
elderly people, women, young people

2. Tax reform : change of tax burden structure

- tax burden heavy on working generation
⇒ tax burden borne by both working generation
and retired generation with a wider tax base
- difficulties of “silver democracy”

3. Growth strategy
- increase productivity, encouraging innovation,
deregulation, etc.
22
Non-labor force population wishing to work
(2017)
( ten thousand of people)

65 years of age
or older

15 to 64 years
old

Male Female

Source: Cabinet Office “Annual Report on the Japanese Economy and Public Finance 2018” 23
 “M-curve” of female labor force
The female labor force participation rate declines
% between the ages of 30 and 39

Sweden

Germany

Japan (2000) Japan (2017)

A lot of female workers quit before taking childcare leave, because it is not
easy for them to continue to work after the childcare leave period.
24
Source: Cabinet Office “Annual Report on the Japanese Economy and Public Finance 2018”
 Labor force participation rate
of 65 to 74 years old
(%)
Japan

US

Canada

UK

Germany

Italy

France

OECD Average
Source: Cabinet Office “Annual Report on the Japanese Economy and Public Finance 2018” 25
High working motivation among elderly people
Until what age do you want to work? (aged 60 and over)

(Source) Ministry of Health, Labor and Welfare 26

 Lifetime employment system
(long-term employment)
 Seniority-based wages
(wage rises with age and length of employment in the same company)
divergence of wages from productivity
 Restriction of mid-career recruitment
without performance-based wages
 Vocational training in-house
accumulating know-how and technologies peculiar to the company
 Part-time workers to adjust man-hours
supplementary income household from housewives

The system can be sustained only when companies continue growing

at a high rate and increasing the number of new graduates employed
27
⇒ Change is now underway
 Inflexible labor market
 Movement to growth
Lifetime
employment system
sector is difficult
 Failure to make use of
 Seniority-based human resources
wages
young people, women
 Restriction of mid- elderly people
career recruitment
 Vocational training
in-house
 Part-time workers to
adjust man-hours Necessity to create
new employment
system for Japan
- Flexibility and Security -
28
 Decline of savings rate in Japan
According to the lifecycles hypothesis, aging will have the effect
of decreasing the household savings rate.
(%)

30
Aging ratio
Savings rate 26.927.3
27.7
25 26.2
24.1
22.823.223.323.3
20 17.5
18.4 21.5
22.1
16.816.616.7 20.320.8
15.9
15.114.9 18.5 19 19.5
14.8
13.9 17.5 18
15 13.613.8
12.6
13.5
15.716.2
16.7
15.1 Elderly people aged 65 and over
14.114.6
13.6 11.8 as a percentage to total population
12.613.1 9.6 9.3
10 10.610.9
11.211.6
12.1
8.1
8.7
8.1
9.8 9.9 10.3
9.1 9.3 9.6 6.3
3.5 4.4 3.9
5 2.8 2.6 2.9 2.8
3.5 3.6
2.2
2.8 2.5
1.7 2.0
1.0
0.2
-1.0
0

-5
80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
(FY)

Source: Cabinet Office, “Annual Report on national Accounts”; Ministry of Internal Affairs and Communication, “Population Estimates”
(%)
Trends of household savings rates
Worker’s household
(under-sixty)

Elderly worker’s All households

household (over-sixty) Elderly household without
job (over-sixty)

source: Cabinet Office

 Solutions to overcome the decline of
household savings
1. Implement fiscal consolidation

2. Promote inward FDI

3. Utilize household financial assets for

economic growth
increase the share of risky assets

31
 経4-26 Balance of inward FDI to GDP
（％）
60
UK

50
46.15

45.34
France
40
34.25
US
Australia
30 28.44

22.47

20
Korea 13.28

10 Germany

Japan
3.80

0
32
Source： UNCTAD STAT
Composition of household financial assets

33
Source: Bank of Japan “Fund flow of Japan, US and Euro area 2016.12.22 “
 Policy subjects for ageing society
1. Reform of social security system
- sustainability
- efficient service of medical and nursing care
2. Reform of labor market
- increase of labor participation rate
- increase of labor productivity
3. Tax reform
- simultaneous pursuit of increase of tax revenue and
economic growth
4. Countermeasures to the declining birthrate
- making good environment for working women to raise
children 34