Japan Center for Economic Research
January, 2020

2060 Digital & Global Economy

JCER, Japan Center for Economic Research, the Japan's leading think tank, predicts theglobal economy in 2060, focusing on digital technologies that continue to evolve and have adisruptive impact on the economy and society. We illustrate the results in series.

Lead Economist,
Sumio Saruyama*
Principal Economist, Kengo Tahara

5. Three reforms revive Japan
Japan cannot ride the digital wave.
The bright future of the Japanese economy is hard to expect. Negative growth will be thestandard from the 2030s in the Baseline Scenario. There are three reasons.
First, even if the influx of foreign workers, which has increased in recent years, continues
at the current pace, the birth rate of 1.4 will not stop the decline in the workforce.
Second, its digitalization is lagging. Japan has less investment in intangible assets as apercentage of GDP than the United States and most European countries. In particular,investment in business models that link assets, such as information and technology toadded value is insufficient. Japan has a higher percentage of manufacturing than otherdeveloped countries, and its persisting amount of investment in tangible assets is also afactor that slows down digitalization.
Third, the framework for data utilization is not well established. The right of "Data
Portability" is not well guaranteed. It is difficult to make sufficient investment to build a
new business model by making the most of data resources.
Working generations will suffer disadvantages of aging
GDP per capita will increase moderately as productivity growth remains positive. But thatwill not lead to a better standard of living. This is because there is an increasing burden
to support the elderly who are increasing their share of the population. Real Consumption
Expenditure per capita of the working generation will gradually decrease toward 2060
(Baseline Scenario).
The percentage of people aged 65 and over will increase from 26% in 2015 to 38% in
2060. In particular, the percentage of those aged 75 and over doubles from 13% to 26%.
This will boost medical and nursing care demand and government expenditure.
*

Email: saruyama-at-jcer.or.jp

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2060 Digital & Global Economy
Japan Center for Economic Research

Most of medical and nursing care costs are covered by social insurance premiums andtaxes, so it is inevitable that the burden on active workers will increase. An average
worker will not be allowed to enhance his/her disposable income sufficiently even aswages grow. Our forecasts indicate that the proportion of tax and social security
contributions in national income will rise from 42% in 2017 to 50% in 2060. We assume
Consumption Tax rate will be raised to 15% from the current 10%. Real Consumption percapita, which represents the living standard of the working age group under 59, isgradually decreasing.
Real Consumption Expenditure per capita in Japan
5

Millions of Yen, 2015 prices

ReformScenario

4.5
4Baseline
Scenario

3.5
3
2.5
2
2000

2010

2020

2030

2040

2050

2060

Year

Source:Japan Center for Economic Research, Long-term Forecast, December, 2019.

Boost growth with digital investment
To improve the living standards of Japanese people, three things are necessary.
First is the acceleration of economic growth. There is a need to increase the amount ofintangible asset investment, which is inferior to other countries. It should have a systemthat promotes the distribution and sharing of data, which is a fundamental resource of thedigital society. The use of data to better understand people's needs will drive investment
in building business models for it. Our simulation suggests that raising intangible
investment by 5% of GDP will increase real growth by 0.2% to 0.4% annually.
The second is to implement fiscal reforms to reduce the burden of aging. We propose thefollowing reforms. (1) Promote digitalization of medical and nursing care services toimprove efficiency to reduce medical and nursing care fees as of 2060 by 10%, (2) Raise
out-of-pocket expenses for elderly people who use medical care and nursing care fromabout 10% to 30%. (3) Do not raise social insurance premiums that impose a15January, 2020

2060 Digital & Global Economy
Japan Center for Economic Researchdisproportionately heavy burden on working generations, but instead raise Consumption
Tax to finance social security resources.
If all of these are implemented (Reform Scenario), the Real Consumption level of theworking generation can be increased by about 1 million yen by 2060 (Figure).

Enhance measures to stop population decline
Third is population stabilization. The Japan Center for Economic Research called for apolicy to halt population decline in a long-term forecast five years ago. Back then, weproposed to raise the birth rate from 1.4 to 1.8 and to increase foreign acceptance to200,000 a year. Foreign influx has increased to 170,000 in 2018, but fertility rate hasremained flat. Japan’s population will decrease 22% during 2020-2060.
To raise the birth rate, it is necessary to make up for the losses (opportunity costs) thatwomen incur when she quit their jobs with priority on childcare. They give up what theywould get if they keep working, such as pay raises, promotions, and exciting opportunities.
It is also important to create an environment where women do not have to quit jobs when
they have children. To that end, it is necessary to expand benefits to child-rearing families
both in cash and in kind, mostly child-rearing facilities, substantially to the levelcomparable to those in European countries as a percentage of GDP. We found that thebenefits of additional 8 trillion yen, 1.6% of GDP, would raise the birth rate to 1.8 basedon the panel regression using OECD countries data.
The Shinzo Abe administration claims to enhance "All-generation social security."
However, the situation in which the young generation suffers from raising children has
not changed. Although progress has been made free childcare fees free, there are still notenough childcare facilities to take care of children. Since the profitability of the childcare
business is low, the number of businesses trying to enter the childcare business does notincrease. Childcare workers are understaffed due to their low wages. It is necessary toincrease both the revenue of childcare business and the wages of childcare workers thatare virtually determined by government.
If the population structure becomes more well-balanced with rising birth rates, the burden
on each individual will decrease. That will make it easier for young generations to havebetter living standards and have hope in the future. There is much to do left to stabilize
Japan's population.

16January, 2020