The Economist on population aging in Japan

Greying Japan

The downturn
Jan 5th 2006 | TOKYO
From The Economist print edition

But ageing employees need not be a problem, if companies adjust
JAPAN’S population is in decline. As of last October 1st, the government announced last week, giving the results of its latest five-yearly census, Japan’s 127m-odd population was 19,000 fewer than a year earlier. Deaths had outstripped births for the first time in a period of peace since records have been kept. A falling population, the Yomiuri Shimbun duly wailed, meant that national survival was at stake. It may have a point: with no change in the current fertility rate–below 1.3 children per woman of child-bearing age–the last Japanese will die as soon as 2800.

Such are the perils of extrapolation. The more immediate demographic issue, though, is not so much the predicted fall in Japan’s population, to as low as 100m in 2050, some say, but rather a shift in its composition. For as well as a low birth rate, life expectancy continues to lengthen (if that were not so, Japan’s population would have started to fall some time ago).

Japan is greying at an unprecedented rate. Half a century ago, the proportion of the population over 65 stood at around 5%, well below that in America, Britain, France or Germany. Today, Japan’s proportion of elderly, at 19%, is the highest in the world, and is forecast to reach almost 30% by 2025. In particular, an exceptionally large group of Japanese, the baby-boom generation, is making its way towards retirement. After the second world war, returning Japanese soldiers married, settled down and produced children in large numbers. Between 1947 and 1949, an average of 2.7m children were born a year (with another 2.3m in 1950). That was 30-40% more than in the succeeding years. It made for a more defined population pyramid than, say, America, where the baby-boomers were born over several more years. Today, the country’s demographic profile looks something like a Japanese lantern. Soon, it will look more like a narrow-based urn (see chart).

From next year, the baby-boomers start to retire (60 being the minimum mandatory retirement age for now). The prospect is causing some anguish among policymakers. As youngsters, these people were the shock troops during the golden period of Japan’s post-war economic transformation. Today, they are the custodians of years of accumulated technical and management skills. Their absence, some suggest, will lead to a shortage of skilled workers and mentors, a loss of productivity and even a surplus of office space. Mama-san in her bar in Ginza will miss this lot.

A less noticed aspect of the greying of Japan is the coming sharp decline in the population of the youngest workers. At present, some 16m Japanese are in their 20s, many of them children of baby-boomer parents. But the number in this age bracket will shrink by about 3m over the next decade. The consequence of all this is, first, that fewer workers will support an ever growing number of non-workers, other things being equal; and, second, that the demographic shape of the workforce is assuming that of an inverted pyramid, with fewer young workers at the base where once there were many. These factors combined lead some commentators to speak of dire consequences: of a national malaise led by a decline in living and even educational standards (soon, for instance, you will be able to gain a place at university simply by sitting the exam), accompanied by a government bankrupted by retirement obligations.

Yet this is all far from inevitable. Atsushi Seike, a labour economist at Keio University, argues that, since the great bulk of older workers are company employees, the solution lies in fixing the corporate employment and retirement systems to allow people more easily to work for longer. Those systems were designed for the age of the pyramid. When lots of young people were coming into the workforce, mandatory retirement was adopted by companies who wanted to make room for them. The policy was also useful for getting rid of surplus workers that employment-protection laws otherwise stopped from being laid off. As a result, nine-tenths of companies with more than 30 employees today set a mandatory retirement age, usually 60, the legal minimum.

The government and some companies are starting to respond to the new circumstances. Already, eligibility for the fixed part of the state’s two-tier pension benefit has been raised to 62; it will be 65 by 2013. Eligibility for the bigger, earnings-related part still stands at 60 till 2013, but rises to 65 by 2025. To bring corporate practices into line, a law passed in 2004 takes effect in April requiring companies to raise the minimum mandatory retirement age to 65 by 2013–or, if that is not feasible, to provide employment until they are eligible for the fixed part of the state pension.

These adjustments, Mr Seike thinks, are just tinkering at the edges of an outdated system. Since life expectancy has leapt by nearly 30 years since the war, to 82 on average, then the minimum age for pensions should be raised swiftly at least to 67 and preferably to 70. Moreover, he believes, mandatory retirement–forcing people to stop when they are keen to work longer and capable of doing so–“has no place in a society that hopes to make full use of its older citizens.” It should be scrapped altogether. So should age discrimination in hiring: many job advertisements are closed to anyone over 45.

Certainly, most older Japanese want to work. Indeed, the average working man finally leaves the labour market when he is approaching 70. The problem is that he is given jobs that do not always match his abilities. A system of pay based on seniority rather than merit, which once ensured employee loyalty, now imposes a financial burden on companies, making them unwilling to keep even good workers in their former jobs. So getting rid of mandatory retirement would also put welcome pressure on companies to revise pay scales better to reflect ability rather than length of service. That, surely, would suit ambitious younger people too.

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