Wednesday, September 02, 2009

Why The Japanese Economy Will Continue To Decline

If you want to know why Japan, unlike China, is in a secular long-term decline you can look at population statistics.

At first glance, nothing dramatic seems to have happened. 5 years ago, the population was 127.7 million, now it is 127.6 million, not much change. But look closer and you will see some very dramatic changes. In 2004, the population below the age of 15 was 17.7 million, the population aged 15 to 64 was 85.1 million and the population aged 65 and over was 24.9 million.

In 2009, the population below the age of 15 had dropped 3.5% to 17.1 million, the population between 15 and 64 had dropped 4% to 81.6 million, while the number of people older than 65 had increased 16% to 28.9 million.

During the next 10 year, this trend will continue as the working age population is set to drop at an even faster rate. In the age group of 5-14, the population is 11.7 million, while in the age group of 55-64 the population is 18.6 million, meaning that the working age population will drop by an average of 0.9% per year.

This will not only mean fewer workers but also less capital equipment as people tap into their savings (including the savings in government pension funds) at old age. We have already seen the beginning in this drop in savings as the personal savings rate has dropped dramatically and as overall savings has also dropped significantly. In 1994, private and government consumption was 69.8% of GDP, a number that increased to 77.4% in 2008, meaning that the implied gross savings rate dropped from 30.2% to 22.6%.

See also Steve Malanga's article on the subject.


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