Implications of aging population will pose crucial policy issues for Japanese authorities

• Pages: 337-345

Page 337

In conjunction with its annual Article IV consultation with Japan, IMF staff prepared a background paper (Japan—Selected Issues) on a number of key topics. Two chapters of that paper dealt with the macroeconomic and fiscal implications of Japan’s aging population. The authors—Hamid Faruqee, an Economist in the Research Department, and Martin Mühleisen, an Economist in the Asia and Pacific Department—speak with the IMF Survey about their findings.

IMF SURVEY: Over the past decade, industrial countries have grown more aware of the significant macroeconomic implications of aging populations, but Japan’s circumstances seem particularly urgent.

FARUQEE: Population aging is a characteristic of most industrial countries. Societies that achieve higher living standards customarily see their mortality and fertility rates fall—something that is referred to as a demographic transition.

Where Japan differs from other industrial countries is in degree. The rate of increase of Japan’s elderly dependents is much higher than elsewhere. Ten years ago, Japan had the lowest share of elderly dependents among industrial countries; now it has thePage 343 highest. Some studies have suggested that a relative lack of child care facilities has exacerbated the impact on family size of rising female participation rates in the labor force. Whatever the cause, the decline in fertility rates has been much more dramatic in Japan. The country expects to see a comparatively faster rate of aging and a greater increase in elderly dependents. The country can also expect an overall decline in its population—something that sets Japan apart. Among the industrial countries, only Italy comes close to Japan’s experience.

IMF SURVEY: Why is the IMF looking at the macroeconomic implications of aging in Japan now, and what concerns were your studies designed to address?

MÜHLEISEN: Japan has long been known for its strong fiscal position. Like its people, the Japanese government has been fiscally conservative and traditionally has had little debt and relatively low expenditures. But the fiscal situation, like the demographic situation, has seen a marked reversal over the past decade. Japan has had to run very high deficits—including several large stimulus programs—to keep its economy afloat after the bubble period in the late 1980s. Within a few years, Japan recorded virtually the highest level of gross debt within the Organization for Economic Cooperation and Development.

Japan still has formidable assets, especially in its social security system, but it cannot continue indefinitely without raising concerns about the sustainability and financing of these deficits. The economy is still fragile, so this is not yet the time for fiscal consolidation. But a thinking process must begin; it is hoped this will lead to a strategy for addressing the fiscal problem before the aging problem really kicks in. A...