After a seeming revival through the first phase of Abenomics, Japan looks like it has stalled yet again. This has left the reform-minded Prime Minister Shinzō Abe at a loss for how to break an economic malaise in Japan that has spanned decades. There are a host of factors at play when it comes to Japan’s difficulties in returning to the heady days of the 80s, but the true killer of Abenomics may simply be Japan’s aging population. (For more, see: The Fundamentals of Abenomics.)

Japan’s strong birth rates in the 1950s and 60s provided the labor to fuel the industrial sector that powered Japan’s economic dominance in the 1970s and early 80s. By the time the asset bubble burst in at the start of the 1990s, Japan’s birthrate was falling fast. Since then, Japan has seen decades of deflation and stagnation. (For more, see: Japan’s Economy Contracted in Q2.) This stagnation and deflation combined to create a strong economic disincentive for having lots of children. The drop in Japan’s birth rate accelerated, and the children of the 1950s and 60s continued their march towards their 60s and 70s. This combination of factors has put Japan in the uncomfortable spot where over a quarter of the population is senior and that group looks to become a third of the population by 2030.

An Economy for the Aging

Japan has already started to see the impact of its graying society as new strains hit the medical system and the national programs for pension and health insurance. Many countries have successfully overcome an increase of seniors following boom years, and Japan is adapting. However, the number of elderly along with some of the longest average life spans in the world are tilting the economy more and more toward seniors, leaving less public dollars for the segment Japan desperately needs—young families.

Japan's social security expenditures will continue to grow as the senior segment grows. The strain on health care and the diversion of resources into this sector in the form of senior supports inevitably takes away from other spending priorities. Moreover, the population itself is seeing a dislocation due to younger, mobile labor moving away from non-competitive sectors like agriculture in the rural areas and towards the major cities. This leaves many prefectural and municipal governments responsible for caring and maintaining infrastructure for areas where only the elderly population continues to grow. Many towns, coming under such pressures, have chosen to merge in hopes of maintaining services as the taxpayer base erodes. (For more, see: Aging Population Feeds Global Healthcare Demand.)

Labor Force Woes

This old age economy is a problem for many businesses as well because the labor force will shrink. Already many labor-intensive industries have become dependent on temporary and part-time labor. Japan is in the difficult situation of having to grow its economy while its workforce shrinks. Unless its immigration policy is softened significantly, Japan will need to create growth out of increased productivity per worker rather than by adding workers to the economy.

This is a long road for any economy, but particularly for Japan. Japan has world-class productivity in its export-driven companies, but this high average is pulled down by the domestic industries with low automation, poor efficiency, bureaucratic hurdles and protectionist policies resulting in an overall low productivity environment.   

The Bottom Line

Despite positive developments such as a weakened yen and the end of deflation, Japan's population bomb is the true weakness in the long-term economic outlook. Japan is top-heavy in terms of population demographics and it may take something more culturally drastic—like immigration reform—to bring it back from the economic edge.