Demography is often neglected in analyzing and predicting economic trends, which often leads to major distortions in assessments of countries’ performance. Over centuries, we have seen that policy can affect fertility and migration as also the example of the United States shows. Demography is no destiny and it is therefore important to weigh in its importance in economic analysis. Nowhere it is more apparent than in Japan.
With real production, the key measure of economic performance, having increased only by 15% since 2000, which is less than 1% annually, Japan seems the least dynamic of the world’s major economies. Yet, even this result is remarkable given Japan’s aging working population that has been shrinking by almost 1% annually since 2000. In fact, its growth rate per working age person was almost 2%, which is much higher than in Europe or the United States.
That indicator – growth rate per working-age person – is not very popular among economists, who generally focus on GDP per capita. By that measure, Japan is doing similarly as the EU and only a little worse than the US. However, while per capita economic indicators can help understand consumption potential, they do not provide an adequate picture of growth potential, because they include the elderly and the young, who do not contribute to the output.
Even in Japan, where the working age is often shifted, those older than 70 do not produce. Therefore, given this demographic picture, Japan has been doing extraordinarily well in economic terms. Putting a growing aging population in the output equation yields a record low unemployment of 3%. Almost 80% of those who are able to work and want to work do have a job, compared to 70% for Europe and the US.
A first lesson to draw from Japan’s experience is that, despite the Eurozone’s difficulty to boost inflation in an aging society characterized by savings, growth is not necessarily unattainable. Instead, faced with Japan’s growth without inflation, the European Central Bank may admit that attaining a 2% inflation target might not be so important in the end. Yet, given the European peculiarities and particularities, the ECB won’t likely have a choice but to continue the bond-buying program.
Second, a country with a large savings surplus can manage a large public debt, because it can be financed internally. That does not necessarily mean that it is desirable to continue running up the debt. Japan’s debt-to-GDP ratio now goes beyond 150% of GDP and continues to go up due to large fiscal deficits. The key lesson taken from Japan, however, is that in a low-growth economy, the debt-to-GDP ratio can get out of control fast.
Fortunately, this has been likely already learned in the Eurozone with an average deficit amounting to only 2% of GDP with the deficit cap imposed by the Stability and Growth Pact (3% of GDP) having stabilized the debt ratio. The structure of the single currency area imposes hurdles to the use of both fiscal and monetary policy. This should prevent the excessive build-up of debt, ultimately helping the Eurozone to manage a future in which the only way to sustain growth is to capitalize fully on the economy’s falling demographic potential.
‘Demographic Lessons from Japan for Europe’ – Commentary by Daniel Gros – Centre for European Policy Studies (CEPS).
(The Commentary can be downloaded here)