Can the economy grow in Japan where the population continues to decline?

A declining birthrate has a critical impact on economic development

Economic growth theory, my research theme, is an academic research field in which we try to figure out what is needed for an economy of a country or a region to develop sustainably and stably, or why an economy becomes stagnant.

In conclusion, a declining birthrate and aging population will have a critical impact on economic development. As we can see clearly when we look back the history of human beings, if we do not have people, the economy does not function well.

In economic growth theory, when a country’s economic scale increases in the long run and the citizens of the country become physically wealthier, we regard it as economic growth. In concrete terms, the country’s economic growth rate is measured mainly by gross domestic product (GDP) per capita.

In daily economic news, people pay attention to the expenditure aspect such as who buys what and how, or demand in economics, but in economic growth theory, we focus on supply, or who produces and how. Because there is unlikely to be a situation where people’s purchase amount keeps increasing while the contents and production status of produced commodities (goods and services) do not change at all.

What is needed to produce goods and services is collectively called the production factor and one such need is people’s labor (force). In Japan where the declining birthrate is advancing, it is expected that its labor force will rapidly decrease in the future, and the aging population may negatively impact the GDP per capita.

According to the estimate of the National Institute of Population and Social Security Research, in 2070 the total population will have declined to about 70% of the current population, and among the population, those of age 65 or older are expected to account for about 40%. On the other hand, the productive population of those aged 15 to 64, who are expected to be the center of the labor force, is predicted to drop to about 52% from the approximate 60% of today.

Although employment of women and the aged are advancing, if the younger generation continues to decrease at this rate, soon we will reach the limit where we cannot secure the necessary labor force.

Fundamental measures against the declining birthrate and aging population are, of course, to improve the birthrate. As of June 2023, the government is considering measures against the declining birthrate in various ways such as enhancing the child allowance and applying insurance coverage for childbirth costs.

Policies to financially support childbirth and childrearing have already been implemented, however, unfortunately, we cannot say that they have had a dramatic effect on improving the birthrate.

Of course, apart from the discussion over population increase, arranging nurseries and environmental improvement for nursery teachers are also necessary. However, making a decision on childbirth depends on the individual’s judgement. Therefore, however much it was encouraged by subsidies, etc., it is difficult to think that the number of childbirths will dramatically increase by them.

If that is the case, even amid the continuous declining population and birthrate, in order to develop the economy, we need to think about the growth strategy from a different angle from the measures against declining childbirth.

Direction of growth based on the declining population

In fact, in traditional economic growth theory, population growth was naturally presupposed. Indeed, academic articles which assume a negative population growth rate per year can only be found in the analysis of world-historical events like the outbreak of the Black Death.

In that sense, the theme of economic growth under the declining population is academically new and at the same time a very difficult problem.

As previously mentioned, as sustainable growth of the production factor is necessary for economic growth, we need to explore directions for increasing the production factor other than by the labor force.

For example, in the case of a bakery, in order to produce and sell bread, facilities such as ovens and shops will be needed besides workers. This facility is called capital in economics, and strictly speaking, it is defined as things that are accumulated from the past until present in order to produce and sell goods and services and also includes non-physical things such as intellectual property.

Capital is also one of the important production factors, and increasing this is called capital accumulation. An analysis showed a result that when compared with foreign countries, Japan had a lower level of accumulation of physical capital such as facilities and machinery, in quantity and growth rate.

Influenced by the series of bankruptcies of financial institutions in the 1990s, companies have focused more on financial improvement than proactive capital investment. Currently, necessary capital investments are diverse, but perhaps accumulation related to energy and power generation is especially desired.

Electric power in Japan is covered by imported petroleum, LNG (liquefied natural gas), etc., from foreign countries. As the price is rising owing to the Ukraine crisis and weak yen, the more we depend on the imported energy, the more difficult it will become for us to respond to situations such as natural disaster and war. If we cannot procure energy stably, domestic production activities will be disturbed, and thus there will be an adverse impact on economic growth.

However, in a society which aims for decarbonization, it is not favorable to keep depending on petroleum and coal. While the necessity of nuclear power plants should be discussed, it is a little difficult to imagine a society where nuclear power plants will be newly built successively. If that is the case, we can say that investment in renewable energy and power generation facilities with low environmental burdens will be necessary firstly.

There is still room for improvement with regards to transportation systems. For example, while railway services and expressways are chronically congested in the urban areas, inefficient operation and driving status are seen by time zones or weather conditions. In the distribution industry, drivers are scarce. Thus, further promotion of saving manpower and investment in digitalization such as streamlining by automated driving technology and data analysis is desired.

Accumulation of not only physical capital but also human capital is important. Human capital is a capability in a broad sense which contributes to production such as a worker’s skill and knowledge. Simply put, it is the idea that even if the number of workers and quantity of labor do not increase, if their quality increases, it will lead to economic development.

A survey report says that Japan has a high standard of school education when compared among OECD member countries. However, human knowledge is also obtained when working in society. It is known that in Japan, although people study hard before they enter university, the accumulation level of human capital after entering companies is low. When we look at private companies in general, educational efforts, such as training for employees, are lacking compared with those in foreign countries.

If we look at this in relation to the declining birthrate, while the absolute number of young students in educational institutions such as universities is decreasing, the space to accommodate members of society is increasing. For example, I think it is important to arrange an environment where working people can improve their skills through the cooperation between industry, government, and academia, including support from local governments, such as learning related to information at university targeting working members of society in order to cultivate a digital workforce.

Humans overcome difficulties that they make themselves

For economic growth I have mentioned that the increase of production factors consisting of labor force and capital is needed. Besides this, technological innovation is desired.

If we go back to the basic thought of economics, quantities of output of goods and services and the production factor input have close relation. This is called the production function when expressed in a mathematical formula.

Moreover, this production function is influenced by the slightly abstract concept of technology. I will not go into detail here, but intuitively the output of commodities is determined depending on both production factors and technology. The level of technology is thought to be raised by technological innovation.

My research concluded that even if the population declines, if the level of human capital is sufficient, sustainable economic growth through technological innovation is possible. Personally, I think that artificial intelligence (AI), advanced robots, and the data industry can be understood as technological innovation, and by utilizing them well, economic development is possible in Japan, where the population is declining.

For example, in the U.S., centering around the film industry, it is reported that there is a feeling of strong resistance toward AI. People are concerned that their employment will be threatened under the growing population if they are replaced with AI in creating scripts and storyboards. On the other hand, for Japanese animation which is competitive in the world market, although there are lots of ideas, there is not enough manpower. In such an industry, human beings and AI may coexist.

Moreover, in Japan, it is expected that as the working elderly get older, although they are willing to work, more will become physically difficult to move. In such a situation, perhaps it is possible for advanced robots, etc., to cooperate by assisting them and provide a stable labor force.

In other words, because Japan is in the situation where the population is declining, people can find a possibility in which humans and AI coexist.

Humans create new technologies by themselves. If we look back at history, as a result of new technologies, humans themselves threatened their own work. However, each time they were able to overcome the difficulties.

For example, when ATMs appeared, machines replaced humans to conduct some banking tasks. However, there is a case that by allocating the extra money that was generated to loan operations, banks actually increased the number of workers after the implementation of ATMs.

In the economy, human beings and products are treated similarly in the sense that both generate values. However, unlike machines, human beings try not to disappear and continue to live. In my opinion, economics understands humans as beings who overcome self-made difficulties as such.

A declining birthrate and an aging population and depopulation are indeed new difficulties for human beings that have naturally kept increasing. I believe that even in the situation where the population is declining, sustainable economic growth is possible.

* The information contained herein is current as of August 2023.
* The contents of articles on Meiji.net are based on the personal ideas and opinions of the author and do not indicate the official opinion of Meiji University.
* I work to achieve SDGs related to the educational and research themes that I am currently engaged in.

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