May 30 , 2012

Bank of Japan

Demographic Changes and Macroeconomic Performance:

Japanese Experiences

Opening Remark at 2012 BOJ-IMES Conference hosted by

the Institute for Monetary and Economic Studies, the Bank of Japan

Masaaki Shirakawa

Governor of the Bank of Japan

1

I. Introduction

Good morning. I am very pleased to have a lot of participants from central banks,

international organizations, and academia in this year’s annual BOJ-IMES Conference.

On behalf of my colleagues at the Bank of Japan, I am privileged to welcome you all

here in Tokyo.

The theme of this year’s conference is “demographic changes and macroeconomic

performance.” On the theme, I am sure that Japan is the most notable case that

provides a basis for discussion. Japan’s population and the working-age population ––

that is, the population aged between 15 and 64 years –– came to decline after their

peak-years in 2007 and in 1995 respectively. The share of the population aged 65

years or older rose rapidly to 23% in 2010 from 12% in 1990 (Chart 1). In the

meantime, Japan’s economic growth gradually slowed during the past two decades

mainly for two reasons. In the former half of the period, the Japanese economy was

hobbled by the crippling effect of the burst of the bubble. In the latter half, the rapid

population aging hampered the Japanese economy through a variety of channels. In an

attempt to illustrate that, I frequently rely on the cross-country comparison of growth

rates including Japan. Among G-7 countries, the Japanese GDP growth rate per

working-age population –– an indicator least affected by demographic changes in the

short run –– was the highest. By contrast, the Japanese per capita GDP growth rate

was almost the same as the average, and the Japanese GDP growth rate, which is subject

to the decreases in the total population, was below average (Chart 2). Neoclassical

growth theories normally do not distinguish the overall population from the

working-age population due to analytical simplicity. However, without taking into

account the distinction between the two variables explicitly, the very challenges that

Japan is currently faced with will be outside the scope of analysis.

In the macroeconomic policy discussions in other economies, Japan’s experiences are

frequently cited, and a lot of lessons are drawn over the past decade. However, a

general conclusion obtained in such policy discussions without considering the

differences in the demographic factors between Japan and other economies could

sometimes be misleading.

2

Various challenges posed by demographic changes have been and will be among the

paramount issues lying ahead for a broad group of countries including Japan. For

example, growth rate of the Chinese working-age population has slowed since the late

1980s, and is projected to turn negative by 2020 (Chart 3). Other Asian economies

will also find themselves in the midst of population aging in due course. It is a

must-face reality which is just yet-to-come. Looking at Europe, in the Euro-area

peripheral countries, immigration contributed to the expansion of the populations until

2007. Conversely, after the global financial crisis, the immigration momentum was

lost and some countries in the region are now faced with even some emigration while

suffering from lower economic growth owing to the lower population growth or even

because of the declining population.

Rather than trying to cover all of the relevant topics under the theme of demographic

changes and macroeconomic performance in my remark, I focus on Japan’s experience

of population aging that, I hope, will help ensuing discussions in this conference,

because Japan can be addressed an “advanced country” in a sense that it has been faced

with various challenges that stem from population aging ahead of other countries. I

begin by explaining demographic changes in Japan briefly, and then move on to

identifying the issues related with macroeconomic performance. Finally, I will touch

on the policy implications of demographic changes.

II. Demographic Changes in Japan

I begin by pointing out four relevant facts in order to consider the linkage between

Japanese demographic changes and macroeconomic performance.

First, in former times, the Japanese population growth rate was high, and the Japanese

working-age population was remarkably large. Today, this may sound way beyond our

imagination. However, in the aftermath of World War II, overpopulation was

considered a challenge to cope with. For example, Japanese emigration to Brazil by

sea was restarted in 1952 and continued until 1973. It is usually understood that

Japan’s period of high-growth began in the mid-1950s and ended in the early 1970s.

3

The expansion of the working-age population, in tandem with the free trade regime,

provided strong grounds for rapid growth. A comparison of the Japanese population

by age group between the beginning and the end of the high-growth era clearly points to

a rapid increase in the Japanese working-age population taking place during the period

as confirmed by Chart 4 showing a blip moving upward in the population pyramid.

For your reference, the average growth rate of the total population and the growth rate

of the working-age population from 1955 to 1975 were 1.3 percent and 1.9 percent,

respectively. A quick cross-country comparison can confirm that Japan’s population

and the growth rate of the working-age population in those days were relatively high, or

sometimes even the highest, among the advanced countries.

Second, the rapid pace of decrease in the growth rate of the Japanese population and

that of the working-age population were globally unprecedented. The trend of a

population depends crucially on the birth rate and the death rate (Chart 5). The

Japanese total fertility rate declined substantially after the 1950s, and reached 1.39 in

2010, a lower level compared to that in other advanced countries. The Japanese death

rate also declined substantially after World War II and reached 6.0 (per thousand

persons) in 1979. Then it increased gradually and reached 9.5 in 2010.

Third, interestingly, the recurrent declines in the total fertility rate have long been

regarded as a one-off aberration for each point in time. Such mis-recognition led to the

recurrent overestimation in the official projection of the fertility rate every five years,

which has been used in the actuarial valuations for the Japanese public pension system,

since the year 1976 (Chart 6). In the official projections, the long-run fertility rate

have even been assumed to rise to two in due course until 1992 when the projection was

revised downward well below two for the first time.

Fourth, in addition to the delay in recognition of the ongoing demographic changes,

comprehension of the far-reaching implications of the changes was even more delayed.

Consequently, it took further time for Japanese people to take the measures to respond

to the expected demographic changes. Incidentally, if you look back at 1992, the

White Paper on the National Life Style published by the government that year was titled,

4

“The Advent of Society with Low Birth Rates: Its Effect and Response.” With hindsight,

Japan around that time was painfully looking for ways to recover in the aftermath of the

bubble economy. At that stage, I recall that most Japanese people along with

economists did not grasp the gravity of population aging coupled with a low birth rate

for Japan’s economy as properly as we later came to realize. In that regard, for

example, a database on Japanese news paper articles indicates that articles on

population aging or a low birth rate started increasing in the 1990s. However, it was

only until in the middle of the 2000s, articles on population aging or a low birth rate

outnumbered those on asset price bubbles or non-performing loans (Chart 7). Up until

around that time, the working-age population had declined for about ten years.

III. Effects of Demographic Change on Japanese Economy

In the light of Japan’s experience, I will elaborate on three aspects, first, the economic

growth rate, second, inflation and, third, the current account balance, of the impact of

demographic changes from the viewpoint of macroeconomic performance.

Economic growth rate

At the outset, I pick up the most paramount consequence of demographic changes for

the Japanese economy, among others, that is, the economic growth rate.

The economic growth model supposes that everyone works at a given intensity. With a

labor-augmenting technological change, in the long run steady state, per capita variables

grow at the rate of technological change, and aggregate variables grow at the rate equal

to the sum of population growth and technological change. In aging economies,

including Japan, where the working-age population has started decreasing, the labor

force also declines, given the participation rate being held constant. Because the

scarce labor force imposes a natural constraint on labor supply, the marginal product of

capital declines accordingly. As a result, macroeconomic growth would be impeded.

With this idea in mind, the Japanese economic data in the past decade indicates that the

workforce declined by 0.3 percent point, labor productivity increased by 0.8 percent

point, and they add up to real GDP growth rate increase by 0.6 percent1 (Chart 8). 1 The contributions do not add up to the total GDP growth rate (0.6 percent) because of the rounding errors.

5

Having said that, while such an analysis would provide a useful first-order

approximation to consider the effects of population aging and the declining population,

for the sake of policy consideration, we need slightly more realistic approaches that

incorporate other factors.

The first factor is the possibility that labor participation may adjust to the demographic

changes in the long run. For example, the labor participation rate of Japanese females

was notably lower than that in other advanced countries. In particular, Japanese

females in their 30s participate in the labor market noticeably less, which was creating a

stark M-shaped curve in the participation ratio over ages in the past and in the present as

well. However, the gap between Japan and other advanced countries in the depth of a

dip on the M-shape is dissipating in recent years (Chart 9).

The second effect comes from the gap between the per capita growth rate and the

growth rate per working-age population. The economic growth model by Solow

supposes that a nation’s population coincides with that nation’s labor force. In practice,

as population aging advances, the gap between the population and the labor force grows

larger. In the process of an increase in the share of the old non-working population,

the per capita growth rate would be lower than the growth rate per working-age

population. The growth rate per working-age population is important from a

viewpoint of the supply capacity; however, the growth rate per capita is a more

important indicator when we think about the income level of an average consumer who

supports aggregate demand for goods and services in the macroeconomy. Even if the

growth rate per working-age population is high, as long as the per capita growth rate is

decreasing, downward pressure to demand could impede macroeconomic growth.

Third, we may need to consider the so-called “spending wave” hypothesis (Chart 10).

For one reason, the Japanese asset price bubble was caused by Japanese baby boomers

who experienced their peak spending years, particularly, for mortgages. During the

bubble period, they indeed actively purchased their homes. Likewise, demographic

changes, among other factors, were highly responsible for the decrease in domestic car

sales after the late 1990s. On the other hand, the progress in population aging means

6

that the elderly increase demand for services, such as medical and nursing care.

Currently, the population aged 60 years or older accounts for around 40% of Japanese

consumption. Their shares in the Japanese consumption are projected to increase

further. If Japanese firms change their products in responding to such increase in the

potential demand, their efforts should slow the reductions in the potential growth rate.

The fourth factor arising from demographic changes could come into play through fiscal

balance (Chart 11). Rapid population aging is the dominant factor in increasing a

fiscal deficit. Obviously, the continued population aging increase a fiscal deficit

through the decrease in the growth rate of tax revenues reflecting the decrease in the

economic growth rate and through the increase in the social security related expenditure,

such as medical services, nursing services and public pension. If the uncertainty

regarding the future fiscal balance increased, that could restrain the consumption by

working-age generations. Demographic changes also affect fiscal balance through a

political process. Population aging will necessarily mean the aging of voters. If the

elderly have a higher voting percentage compared with the young, and if the elderly

have a stronger preference for sustaining the current social security system, then a fiscal

deficit tends to increase reflecting the elderly’s preference.

Fifth, demographic changes may affect the portfolio selection of households (Chart 12).

Especially, we need to examine the effects of an increase in the number of elderly

people on the selection of households’ financial assets, from a viewpoint of who and

how to supply risk money, which is an indispensible engine for economic growth.

However, the determinants of households’ financial asset portfolio include not only age,

but also labor income. Moreover, households choose their asset portfolio while

making decisions on their housing purchases simultaneously. We do not have

empirical studies based on Japanese micro-data enough to answer the following

questions, such as, all else being equal, whether the elderly prefer stocks or whether

they tend to sell their stocks and buy into the bond market for safer assets.2 Looking

ahead, further studies on that area are much awaited.

2 See Fujiki, Hirakata and Shioji [2012].

7

So far, my analyses focus on the effects of demographic changes on macroeconomic

performance of the Japanese economy as a whole. In practice, demographic changes,

such as population aging or a low birth rate, advance unevenly across regions. For

example, the population growth rate, the working-age population and the share of the

population aged 65 years or older vary substantially from region to region (Chart 13).

Behind the dispersion in prefectural growth rates, regional fiscal balances and the

strategies of financial institutions lie uneven developments in demographic changes

across prefectures.

Rate of price increase

Next, I elaborate on the linkage between demographic changes and deflation from a

viewpoint of macroeconomic performance. Seemingly, there would be no linkage

between demography and deflation. But it may not be the case. A cross-country

comparison among advanced economies reveals intriguing evidence: Over the decade of

the 2000s, the population growth rate and inflation correlate positively across 24

advanced economies (Chart 14). 3 That finding shows a sharp contrast with the

recently waning correlation between money growth and inflation (Chart 15).4 How

could we square those facts with each other?

To some extent, the correlation between population growth and inflation could in part be

explained by the co-movement caused by business cycles. In some advanced

economies in Europe and North America, it could be the case that the fluctuations in

economic activity would vary the size of an output gap, creating pressure up or down on

inflation while attracting or discouraging immigration that amplifies variations in

population. That hypothesis, however, appears to be impertinent in some countries

including Japan where the impact of immigration on the total population is extremely

small and thus can be disregarded. On that ground, business cycle fluctuations have

had a minimal impact on demographic changes. A closer look at the case of Japan

confirms the increasingly positive correlation between inflation and population growth

3 Another cross-country inspection based on a broader sample, including developing countries, does not detect positive correlation between inflation and population growth in the 2000s and in earlier periods likewise. 4 See Kimura, Shimatani, Sakura, and Nishida [2010].

8

since the 1990s (Chart 16). That would reflect the momentum towards real income

creation being undermined by population aging.

As I have discussed, repercussions of the bubble-burst, the rapid aging and stagnation of

productivity have been underway in Japan. Against the backdrop, the real per capita

GDP growth rate has remarkably declined from somewhere around four percent back in

the 1980s to almost one percent these days (Chart 17). With the yet-to-accelerate

population aging well envisaged for the foreseeable future, the decline in the real GDP

growth rate could undermine the medium- to long-term expectations for potential

growth, giving rise to a lower permanent income of households.

The decrease in potential growth, which effectively means a stagnant supply capacity,

gives rise to a lower permanent income. On the flip side, the corresponding

contraction in aggregate supply would offset such decline in aggregate demand.

Simultaneous changes in aggregate demand and aggregate supply keep the price level

unchanged. I reemphasize the fact, however, that the public had long remained by and

large unaware of the dangers created by demographic changes but, over time, the

awareness has slowly been phased in. Along with such gradually phased-in public

awareness, yet-to-materialize declines in GDP growth have also been factored in,

precipitating today’s decrease in aggregate demand and all the forward-looking

responses have come into play behind Japan’s deflation.5

In the meantime, the real per capita GDP growth rate in most of American and European

advanced economies has declined to Japan’s neighborhood range (Chart 17).

Looking ahead, aging and the declining working-age population are expected to

continue in those American and European countries. I cannot entirely rule out the

looming menace that may unveil itself into downward pressure on inflation rates if such

demographic changes are to undermine the momentum toward income creation in the

economy.

5 See Katagiri [2012] for a mechanism that a series of unexpected revisions in the forecasts for the Japanese population could lead to protracted deflation.

9

Current account

The final issue that I am taking up from a viewpoint of macroeconomic performance

and the demographic changes is the current account. Some argue that, as signaled by

the swing to a deficit of the Japanese trade balance in fiscal year 2011, the current

account balance will also turn into deficit over time (Chart 18). I disagree with such

views.

The swing to a deficit in the trade balance reflected the declines in exports and increases

in imports, both of which are driven by temporary factors: Exports subsided resulting

from the disruption to the supply chains due to the Great East Japan Earthquake. The

sharp increase in imports of liquefied natural gas and other fossil fuels was needed to

meet the increased demand from thermal power plants, which substituted nuclear power

lost by the accident.

In general, the current account broadly reflects the savings-investment balance of the

economy. On one hand, as for savings, a higher elderly population share in the

economy would reduce the aggregate savings rate as a life-cycle model indicates. On

the other hand, population aging affects investment at least through two channels.

First, if a decrease in the labor force substitutes for capital, domestic investment could

increase. Second, a decrease in domestic demand due to the declining population

reduces domestic investment. If population aging shifts consumption towards the

service industry where firms find it hard to substitute labor for capital, the second effect

will dominate the first effect. Anyway, the Japanese income balance recorded 12.4

trillion yen, or 2.5 percent of nominal GDP on average from the year 2002 to year 2011,

which reflects the net international investment position of 253 trillion yen as of the end

of 2011, or more than 50% of nominal GDP. Those figures suggest that the Japanese

current account surplus will continue for the time being.

IV. Can Japan Respond to Demographic Changes?

Demographic changes have affected the Japanese economy slowly but steadily and

profoundly. Downward pressure on the Japanese economic growth rate resulting from

various channels reflecting the continuing population aging will persist in the

10

foreseeable future. With the pressure underway, should we live with the dwindling

economy and quietly accept it as the fate that we cannot escape? My answer is

definitely no. The effects of population aging on an economy can vary, depending on

the flexibility of that nation’s economy and society. The current difficulties come not

from the continued population aging itself, but from the delayed response to it. On

that ground, I emphasize that, if society correctly recognizes the challenges coming

from demographic changes, and if society judges that changes in the systems are needed,

we should find remedies in our hands. I offer a couple of options for possible changes

if Japanese people are determined to take action.

The first option is to make various efforts to increase the labor force. Setting aside the

issues that go beyond the mandate of a central bank governor, for example, whether to

accept more foreign workers, we can increase the labor force by raising the birth rate

and/or the labor participation rate. Interestingly, labor participation of female workers

and the birth rate have a positive relationship, according to a cross-country data analysis.

Among 47 Japanese prefectures, labor participation of females aged from 30 to 44 and

the birth rate have a positive relationship (Chart 19). Recently, labor participation of

Japanese female and elderly workers increased steadily. Efforts to increase the labor

force have already started and some progress has been made (Chart 20).

The second option is to adjust the supply-side structure with the ongoing changes in line

with the demand pattern. Typical examples on the domestic front include the response

to the potential demand from the elderly, such as medical and nursing services (Chart

21). In the last decade, the population of aged 65 or over increased 33 percent in Japan

and 16 percent in the U.S. During the same period, spending on medical and nursing

services increased 11 percent in Japan and 74 percent in the U.S. Those figures

suggest the large potential demand not only in the market of medical and nursing

services but also in medical equipment and other related investments in Japan.

Third, businesses should respond to the growing demand overseas by making the most

of the momentum towards globalization. If the Japanese economy is a “closed

economy,” Japan will not be able to avoid all the repercussions of the decreasing

11

population. However, Japanese businesses can grow by meeting the demand overseas,

especially in economies with higher population growth or in fast-growing emerging

economies. One option to meet the foreign demand is exports, while other options

may include, for example, bolstering foreign direct investment by Japanese businesses

in pursuit of higher profitability which would result in a surplus in the income balance.

The real GDP increased by 0.6 percent annually on average in the 2000s while, the real

GNI excluding the terms of trade gains/losses, an indicator comparable to the real GDP,

grew more rapidly by 0.7 percent (Chart 22). Of related matters, the ratio of Japanese

foreign direct investment is notably lower than that in other advanced countries.

Room for increasing the ratio would be substantial (Chart 23). Increases in the income

balance surplus may require a renewed focus on GNI, which summarizes the income

earned by Japanese people. Finally, businesses can better reallocate their capital in

line with the aforementioned three options to raise productivity. I have already

referred to the growth rate of Japanese labor productivity, and now I point out that the

level of labor productivity is lower than that in other advanced countries (Chart 24).

Put differently, per capita income could increase substantially if businesses reallocate

their capital to be better aligned with the efficient allocations.

V. Concluding Remarks

I have explained how demographic changes affect the Japanese economy through

various channels. In retrospect, up until the global credit bubble-burst, both academics

and policy makers did not fully appreciate the significance of a bubble-burst. The

Japanese experience of a bubble-burst tended to be underestimated as an idiosyncratic

episode. Likewise, bystanders’ apprehension about the ongoing demographic changes

in Japan may, I fear, be falling short of the mark. My sense is that full apprehension of

the consequences of rapid population aging, coupled with the low birth rate, is yet to be

seen in light of the importance of the issue. Economics has dealt with the issue of

population, not to mention a few examples such as, Petty’s Political Arithmetic or

Malthus’s An Essay on the Principle of Population. For the sake of economic policy

formulation, basic research on demographic changes and their policy implications is

indispensable. I hope that this conference would help contribute to the accumulation

of such research. Thank you.

12

References

Fujiki, Hiroshi, Naohisa Hirakata and Etsuro Shioji, “Aging and Household Stockholdings: Evidence from Japanese Household Survey Data,” paper presented in this conference.

Katagiri, Mitsuru, “Economic Consequences of Population Aging in Japan: Effects through Changes in Demand Structure,” Discussion Paper Series 2012-E-3, Bank of Japan, Institute for Monetary and Economic Studies, 2012.

Kimura, Takeshi, Takeshi Shimatani, Kenichi Sakura, and Tomoaki Nishida, “The Role of Money and Growth Expectations in Price Determination Mechanism,” Bank of Japan Working Paper No.10-E-11, Bank of Japan, 2010.

Shirakawa, Masaaki, “Globalization and Population Aging: Challenges Facing Japan,”

Speech to the Board of Councillors of Nippon Keidanren (Japan Business Federation) in Tokyo, 2011.

Demographic Changes and MacroeconomicDemographic Changes and Macroeconomic Performance: Japanese Experiences

May 30, 2012BOJ IMES ConferenceBOJ-IMES Conference

ki Shi kMasaaki ShirakawaGovernor of the Bank of Japan

Chart 1

D hi Ch i JDemographic Changes in Japan160

Child and aged populationForecast

million

120

140Child and aged populationWorking-age populationTotal populationEmployed persons

Forecast

80

100

40

60

0

20

40

01970 75 80 85 90 95 00 05 10 15 20 25 30 35 40 45 50 55 60CY

Note: Child population working age population and aged population refer to the number of persons under 15 years those between 15

1

Note: Child population, working-age population, and aged population refer to the number of persons under 15 years, those between 15and 64 years, and those over 64 years, respectively.

Sources: National Institute of Population and Social Security Research; Ministry of Internal Affairs and Communications.

Eff t f R id P l ti A i

Chart 2

Effects of Rapid Population Aging

Real GDP Growth Rate Real GDP Growth RateReal GDP Growth Rateper Capita

Average for 2000-10, percent

Real GDP Growth Rateper Working-Age Person

Average for 2000-10, percent Average for 2000-10, percent2.02.02.0

1 2

1.6

1 2

1.6

1 2

1.6

0.8

1.2

0.8

1.2

0.8

1.2

0 0

0.4

0 0

0.4

0 0

0.4

0.0JP US UK Euro

areaDE FR

0.0JP US UK Euro

areaDE FR

0.0JP US UK Euro

areaDE FR

2

Note: A working-age person refers to those between 15 and 64 years old.Sources: World Bank; Haver.

G th R t f W ki A P l ti

Chart 3

Growth Rate of Working-Age Population

5 year-on-year change, percent

3

4 Forecast

2

3

0

1

-2

-1 JapanUnited StatesKoreaChina

-3

2

1955 65 75 85 95 05 15 25 35 45 55

China

CY

3Sources: National Institute of Population and Social Security Research; United Nations.

Japanese Age Structure in the High-Growth EraChart 4

p g g19751955

0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4100

0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4million million

80

90

100

Males Femalesage

80

90

100

Males Femalesage

50

60

70

50

60

70

20

30

40

20

30

40

0 00 20 40 60 81 01 21 40

10

20

0.00.20.40.60.81.01.21.40

10

20

Males Females

W ki l ti ti 67 7% 67 8%

Males Females

W ki l ti ti 60 8% 61 8%

0.00.20.40.60.81.01.21.4million million

Working-age population ratio 67.7% 67.8%

4Source: Ministry of Internal Affairs and Communications.

Working-age population ratio 60.8% 61.8%

Total and Working-Age PopulationChart 5

2 5year-on-year change, percent

g g pGrowth Rate of the Working-Age Population Growth Rate of the Population

2 0year-on-year change, percent

1.5

2.0

2.5

1 0

1.5

2.0

0.0

0.5

1.0

0.0

0.5

1.0

1 5

-1.0

-0.5JapanUnited StatesUnited Kingdom -1.0

-0.5

-2.5

-2.0

-1.5

1955 65 75 85 95 05 15 25 35 45 55

gFranceGermanyAdvanced economies' average

CY-2.0

-1.5

1955 65 75 85 95 05 15 25 35 45 55

Japan United States United Kingdom France Germany Advanced economies' average

Working age population 0 74 0 81 0 59 0 49 0 23 0 35

1955 65 75 85 95 05 15 25 35 45 55CY

Growth Rate in 2010, percent

1955 65 75 85 95 05 15 25 35 45 55

Working-age population -0.74 0.81 0.59 0.49 -0.23 0.35Total population 0.05 0.89 0.60 0.58 -0.06 0.41

5Sources: United Nations; National Institute of Population and Social Security Research.

R i i i th J T t l F tilit R t F t

Chart 6

Revisions in the Japanese Total Fertility Rate Forecast2.4

2.0

2.2 Forecast in 1976

Forecast in1986

Replacement ratio

1.8 Forecast in1992

in1986

Forecasti 1997

1.4

1.6 Forecast in 2002

Forecast

in1997

1.2 Forecast in 2006

Forecast in 2012

1.0 1964 70 76 82 88 94 00 06 12 18 24 30 36 42 48 54 60CY

6

Sources: Ministry of Health, Labour and Welfare; National Institute of Population and Social Security Research.

Newspaper Citations on Low Birth Rate Chart 7

p pand Population Aging

number of articles

5,000

6,000"Low birth rate" or "population aging"

"Bubble"

4,000

"Non-performing loan"

3,000

1,000

2,000

01991 93 95 97 99 01 03 05 07 09 11CY

7

Note: Number of articles found in The Nikkei, The Nikkei Business Daily, and The Nikkei MJ.Source: Nikkei Telecom.

Decomposition of Real GDP Growth in Japan

Chart 8

Decomposition of Real GDP Growth in Japan

6 average of year-on-year changes, percent

4

5 Productivity (real GDP per employed person)

the number of employed persons

Real GDP

+0.92

3

0.9

+0.8

0

1 Forecast

+0.5 -0.3

-0.6 -0.8-1.2

-2

-1

0

Note: Fiscal-year basis. The rates of change in the number of employed persons from the 2010s onward are calculated using the population outlook (medium variant) and the projected labor force participation rates (assuming the labor force

-2 1970s 1980s 1990s 2000s 2010s 2020s 2030s

8

p p ( ) p j p p ( gparticipation rates in each age/sex group to remain the same as those in 2010).

Sources: Cabinet Office; Ministry of Internal Affairs and Communications; National Institute of Population and Social Security Research.

Labor Participation of Female WorkersChart 9

pLabor Participation of Female Workers in Japan Comparison of Labor Participation of

Female Workers in 2010t

90

100percent

90

100percent

60

70

80

60

70

80

40

50

60

1990 40

50

60

Japan

20

30

1990

2000

201020

30United States

Germany

Sweden

0

10

15- 20- 25- 30- 35- 40- 45- 50- 55- 60- 65-

2010

age0

10

15- 20- 25- 30- 35- 40- 45- 50- 55- 60- 65-

9

15 20 25 30 35 40 45 50 55 60 65age 15 20 25 30 35 40 45 50 55 60 65

Sources: Ministry of Internal Affairs and Communications; OECD.

“The Spending Wave”

Chart 10

p g

Housing Starts Domestic Car Sales Real Output in the Medical and Health Care Industryy

1.6

1.8 million

5million

50

60trillion yen at constant 2000 prices

1.2

1.4

3

4

40

50

0.8

1.0 2

20

30

0.6 1980 85 90 95 00 05 10CY

11980 85 90 95 00 05 10

101980 85 90 95 00 05 10

Note: Average in the last five years. The value in 2010 for “Real Output in the Medical and Health Care Industry” is calculated using year-on-year changes from 2006 to 2008.

Sources: Ministry of Land, Infrastructure, Transport and Tourism; Japan Automobile Dealers Association; Japan Mini Vehicles

10

y , , p ; p ; pAssociation; Research Institute of Economy, Trade and Industry.

Fiscal Balance in JapanChart 11

p

FY 2012 Budget (General Account)

Social Security Expenditure by Category

55trillion yen

( )Pensions

51.7 tril. yen(51.8%)

45

50

Medical care30.8 tril. yen30

35

40 National debt service

21.9 tril. yen (24%)

Others 25.4 tril. yen

(28%)30.8 tril. yen

(30.9%)

Welfare and 20

25

30Local

allocation tax grants

16 6 tril yenSocialothers

17.3 tril. yen(17.3%)

10

15

16.6 tril. yen (18%)

Social security

26.4 tril. yen (29%)

0

5

1970 75 80 85 90 95 00 05FY 09

11

Note: The scope of social security expenditure is based on the International Labor Organization standards for international comparison.Sources: National Institute of Population and Social Security Research; Ministry of Finance.

1970 75 80 85 90 95 00 05 09

Chart 12

Household Financial AssetsHousehold Financial Assets

90%

100%

70%

80%

90%

Others

Investment trusts

50%

60%

70% Investment trusts

Equities

30%

40%

50%Bonds

Life insurance

10%

20% Deposits

0%20-29 30-39 40-49 50-59 60-69 70-age

12

Note: As of 2011.Source: Central Council for Financial Services Information

Ratios of Population over 65 Years by Region

Chart 13

Ratios of Population over 65 Years by Region

Under 20.020.0–22.923 0 25 9

Ratio of aged population, %

23.0–25.926.0 and over

13Note: As of 2010.Source: Ministry of Internal Affairs and Communications.

Working Age Population Growth and Inflation:

Chart 14

Working-Age Population Growth and Inflation: Cross-Country Comparison

1990 20001990s 2000s

12year-on-year change, percent

8year-on-year change, percent

8

10

r

567

2

4

6

GD

Pde

flato

r

1234

DP

defla

tor

2

0

2G

Correlation coefficient：0.07Japan

2-101G

D

Correlation coefficient：0.67Japan

-2-1 0 1 2 3

Working-age population growth percent

-2-1 0 1 2 3

Working-age population growth percent

14

Note: For the 24 countries where the data are available among those that joined the OECD by the 1990s.Source: OECD.

Money Growth and InflationChart 15

10

15(-0.18)(0.62)

12025

(0.59)(0.79)

United States France

0

5Adjusted Money Growth (% points)

05

1015

-51970 80 90 00 10

Infration Rate (%)-5

0

1970 80 90 00 10FY

U it d Ki d Japan

152025

(0.31)(0.65)20

30(0.17)(0.49)

United Kingdom Japan

05

1015

-10

0

10

-50

1970 80 90 00 10-20

1970 80 90 00 10Notes: 1. Figures in parentheses are correlation coefficients of 1970-1994 and 1995-2011.

15

g p2. Money growth is selected as M2 for the US and Japan, M3 for France, and M4 for the UK, respectively.

Adjusted money growth is defined as money growth minus real GDP growth. 3. Because of the data discontinuity of Germany in 1990’s, French is selected as the representative of the euro area.

Sources : International Monetary Fund; Statistics by individual countries.

Population Growth and Inflation in Japan

Chart 16

Population Growth and Inflation in Japan

Population and the GDP DeflatorPotential Growth Rate and Expected Inflation in

the Medium to Long Term

9

4

5 Working-age populationLabor force

y/y chg., percent y/y chg., percent

3 0

3.5 4.5

Potential growth rate per capita

percent percent

6 3

4 Labor forceGDP deflator (right scale)

2.5

3.0

3.0 Expected inflation (right scale)

3

1

2 1.5

2.0 1.5

0 0

1

0.5

1.0 0.0

Note: Lagged values are used for population growth because they precede inflation by a year Expected inflation is the inflation

-3 -1 1960 65 70 75 80 85 90 95 00 05 10CY

0.0 -1.51991 96 01 06 11FY

16

Note: Lagged values are used for population growth because they precede inflation by a year. Expected inflation is the inflation outlook for CPI in the next 6 to 10 years by the Consensus Forecast (average of the April and October surveys in each year).

The potential growth rate is calculated by the Bank of Japan.Sources: Bank of Japan; Consensus Forecast; Ministry of Internal Affairs and Communications.

Real per Capita GDP Growth Rate in Advanced Economies

Chart 17

Real per Capita GDP Growth Rate in Advanced Economies

5 Japan United States

ten-year average growth rate, percent

4

Japan United StatesGermany FranceUnited Kingdom SpainItaly

2

3

1

2

0

-1 1971-

8073-82

75-84

77-86

79-88

81-90

83-92

85-94

87-96

89-98

91-00

93-02

95-04

97-06

99-08

01-10

CY

17

Sources: United Nations; Statistics by individual countries.

C t A t T d B l d I B l

Chart 18

Current Account, Trade Balance and Income Balance

35trillion yen

25

30

35Trade balance Service balanceIncome balance Current transfersCurrent account

15

20

5

10

-5

0

-101996 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11FY

18

Sources: Ministry of Finance; Bank of Japan.

Labor Participation of Female Workers and Fertility RateChart 19

p yPrefectures in Japan15 OECD Giants

2 0total fertility rate

2 4total fertility rate

1.8

2.0

2.2

2.4 y

United States

1.6

1.8

2.0 United KingdomFrance

Sweden

1.2

1.4

1.6

Japan Germany

Canada

1.0

Correlation coefficient： 0.381.2

1.4 Japan GermanyItaly

KoreaC l ti ffi i t 0 46

0.8 60 65 70 75 80 85

Labor participation for female workers d

Correlation coefficient： 0.38

1.0 40 60 80 100

Labor participation for female

Correlation coefficient： 0.46

19Note: The left panel includes the15 largest countries in terms of nominal GDP in 2009. The right panel shows the values in 2010. Sources: National Institute of Population and Social Security Research; Ministry of Internal Affairs and Communications; OECD.

aged 30 to 44, percentLabor participation for female workers, percent

L b P ti i ti f A d W k

Chart 20

Labor Participation of Aged WorkersLabor Participation of

Aged Workers (over 60) in Japan Labor Participation by Sex in Japan

50

55

TotalMales

percent

90

100percent

40

45

MalesFemales

70

80

35

40

50

60

25

30

30

40

15

20

0

10

20 Males

Females

20Note: The statistics do not include the data for Fukushima, Miyagi, and Iwate prefectures in 2011.Source: Ministry of Internal Affairs and Communications.

151990 92 94 96 98 00 02 04 06 08 10CY

015- 20- 25- 30- 35- 40- 45- 50- 55- 60- 65-

Chart 21

Population Aging and Health Care Expenditure

Japan Germany United States France United Kingdom

Population over 65 Years(Change from 2000 to 2010, percent) 33 25 16 11 11

E dit f H lth C

Source: United Nations; OECD

Expenditure for Health Care(Change from 2000 to 2008, percent) 11 25 74 49 85

Source: United Nations; OECD.

21

G D ti P d t d G N ti l I i J

Chart 22

Gross Domestic Product and Gross National Income in Japan

GDP and GNI Income Balance

18

20Portfolio investment incomeDirect investment income

trillion yen

116

118 Gross domestic productG i l i di i

CY 2000=100

14

16 OthersIncome balance

110

112

114 Gross national income - trading gains

8

10

12

104

106

108

4

6

8

98

100

102

0

2

1996 98 00 02 04 06 08 10 11FY

94

96

1996 98 00 02 04 06 08 10 11CY

22

Sources: Cabinet Office; Ministry of Finance; Bank of Japan.

FY

Chart 23

F i O t d Di t I t tForeign Outward Direct Investment

90 percent of nominal GDP

70

80 Japan

United States

50

60 Germany

France

United Kingdom

30

40

g

10

20

0 1990 92 94 96 98 00 02 04 06 08 10CY

23

Source: OECD.

Chart 24

L b P d ti it E l d P b C tLabor Productivity per Employed Person by Country

United States

Italy

France

Germany

Canada

United Kingdom

20 30 40 50 60 70 80 90 100

Japan

h d USD

24

Note: Average in 2000s.Source: World Bank.

thousand USD