Aging & Japan’s Economy

By Zhonghe Zhu —

A Japanese man sits on the edge of a tulip field. Source: TruShu's flickr photostream, used under a creative commons license.

A Japanese man sits on the edge of a tulip field. Source: TruShu’s flickr photostream, used under a creative commons license.

With a median age of 46.5 years, Japan is now home to the world’s oldest population. Without  rising labor force participation, a graying Japan will see its working population shrink. This decline in the labor force will in turn steadily reduce Japan’s economic potential barring major improvements in productivity. To address this demographic crisis, Japan faces several choices if it wants to keep the size of its economy growing. The country must either increase the proportion of its working-age population or better utilize its current population. Both approaches will require better public policy and the support of Japanese businesses.

Increasing the working age population by raising the fertility rate has proved difficult. Though a reversal in declining fertility rates would grow the labor market over decades as new generations join the workforce, this change would need to take place immediately. The Japanese government has proposed long-term reforms to encourage young people to reproduce, however these have had mixed success at best.

A second possible approach to raising the working-age population involves increased immigration. While immigration would yield quicker results, it is highly controversial in Japan, a society that has long been resistant to immigration. A more targeted immigration policy might prove more politically feasible and address particular needs. Current policy allows foreign nurses and caregivers to stay for three or four years working at hospitals and nursing homes after passing a national exam. However, because they have to work long hours for low pay, the turnover rate is high, deterring higher-skilled foreign caregivers. A simpler system with better working and living conditions could both attract the higher-skilled caregivers an aging Japan needs.

Besides increasing the working age population, Japan could also better utilize its current population by engaging underemployed women and retiring workers. Despite an above-average proportion of women in paid work among developed countries, many Japanese women work as part-time employees or contractors. And like their developed economy peers, fewer women hold management positions. Women continue to primarily stay at home or work from home to take care of children or relatives. To rectify this, boosting female labor force participation, especially in leadership positions, has been a key plank of Prime Minister Shinzo Abe’s “Abenomics” program.

Prime Minister Abe has recently announced the expansion of nursing care and creation of new day-care spaces, with the intention of pushing more women to return to the workforce. Starting in April 2016, Japan will also introduce a full-scale flexible work hours system for national civil servants to shift the society away from  system that rewards those who work – sometimes unnecessarily – long hours. The policy will give those who are raising children or looking after parents a more flexible schedule. However it is still uncertain how effective these policies can be given societal norms. Today Japan offers one of the most generous paid paternal leave entitlement policies among OECD countries, yet very few Japanese men are even aware of the policy. In addition there are still other disincentives that deter women from working full time, such as the tax break to households where one spouse only works part-time. Moreover, a friendlier working environment for women is also important. Existing problems at the workplace, such as maternal harassment, should be elevated on the national agenda to raise awareness.

With an aging population, keeping the elderly in the labor force is another means of keeping the existing population more productive. Currently, Japanese employers are required to set the mandatory minimum retirement age at sixty. As most companies still use a wage system based on seniority, raising the mandatory retirement age may impose costs for businesses to keep senior employees, and crowd out hiring younger employees. Current law mandates that employers either fully abolish mandatory retirement rules or retain all employees who wish to continue their employment at least until age 65. However, it is businesses that will have to lead in reforming and gradually shifting the norm on retirement and compensation. Automakers such as Honda and Toyota are leading the way in raising the working age or measuring performance over seniority, but more companies need to follow.

Finally, while government policy has made some efforts to reverse the decline in the labor force, Japanese society holds significantly more leverage to effect change. The elderly may have to retire a few years later and accept care from foreign nurses. However, Japan’s population needs to adapt if it is to continue growing. Government policy can only go so far, and reversing Japan’s population decline will ultimately require much deeper change.

Mr. Zhonghe Zhu is a former researcher with the Simon Chair in Political Economy at CSIS.

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