Sayuri Shirai: Demographic changes in Asia and Japan's economic and
financial developments
Speech by Ms Sayuri Shirai, Member of the Policy Board of the Bank of Japan, at a meeting
with business leaders, Kumamoto, 29 November 2012.
* * *
I. Introduction
Good morning, everyone. My name is Sayuri Shirai, and I am a Policy Board member of the
Bank of Japan. I am deeply honored to be able to speak to all of you, as you represent the
administrative, economic, and financial communities in Kumamoto Prefecture.
First, let me briefly outline the content of my presentation. It will be divided into two parts. In
the first part, I will focus on the current demographic situation and review demographic
changes in Japan and other Asian economies, as well as associated trends in household
consumption patterns. After giving this background, the second part of my presentation will
summarize Japan's recent economic developments and price movements, as well as
monetary policy and related issues. After I finish, I am looking forward to exchanging views
with you about my presentation, economic performance in the region, and measures
undertaken to revitalize the economy.
II. Economic growth and demographic changes in Asia
As we are all aware, Japan is a society with a rapidly-aging population caused mainly by a
low birth rate. It is also increasingly recognized that other Asian economies are soon about to
follow Japan's path. Therefore, I would like to look at this issue today and talk about
demographic change, as well as the demographic outlook in the region over the next few
decades.
A. Demographic dividend and demographic burden
The world is increasingly concerned with demographic issues. This is because demographic
changes are closely associated with national living standards and economic growth. To
understand the connection between living standards and economic growth, let us consider a
hypothetical country in the early stage of economic development.
Generally speaking, a country with low living standards and an inadequate medical and
welfare services system tends to face slow population growth largely due to high fertility
counteracted by high child mortality rates. As the economy gradually develops, the country is
likely to experience a decline in the child mortality rate and resultant rapid growth in the
"youth population" (those aged below 15). Subsequently, further growth of per capita income
will reduce the fertility rate.
When the fertility rate first begins to decline, a country generally has an abundance of
relatively young workers, and the growth rate of the "working-age population" (aged 15 to 64)
exceeds that of the total population.1 In other words, the youth and elderly dependency ratio
(hereafter called the "total dependency ratio") - defined as the ratio of the combined
population of the youth and the elderly (aged 65 and over) to the working-age population -
tends to decline. During this period, the high growth rate of the labor force directly stimulates
economic growth. Moreover, the working-age population tends to save more than other
generations and these higher savings indirectly contribute to economic growth through
supporting infrastructure and productive investment activities. Considering these positive
effects of demographic change, this period is often called "the period of the demographic
dividend."2
Eventually, the demographic dividend period ends and a country enters a new stage of
demographic change. In this new stage, a country faces a growing number of elderly
retirees. As the growth rate of the working-age population lags that of the total population,
the total dependency ratio rises. During this period, the decline in the working-age population
is likely to directly depress the economic growth rate. The economic growth rate may also
decline as lower national savings reduce the available support for investment activities.
Because of these possible adverse effects, this period could be called "the period of the
demographic burden."3
B. Japan in the stage of the demographic burden
Summarizing the points made so far, the demographic dividend period starts when the total
dependency ratio begins to decline, and the demographic burden period starts when this
ratio begins to rise (after averaging out fluctuations driven by baby boom periods). Chart 1
reports the general conditions and outlook for demographic changes.
Japan has already entered the demographic burden period, based on United Nations data
since 1950. Since the second half of the 1950s, the total fertility rate has almost always
declined, and reached 1.39 in 2011 (Chart 2).4 Over the same period, life expectancy at birth
increased rapidly. Male life expectancy increased from 50.1 years in 1947 to 79.6 years in
2010, and female life expectancy increased from 54.0 years to 86.4 years over the same
period. In 1970 the ratio of the elderly population to total population exceeded 7 percent (the
threshold used to define an "aging" society), and in 1995 it exceeded 14 percent (the
threshold used to define an "aged" society). This shift from 7 percent to 14 percent took only
25 years in Japan, compared with 61 years in Italy, and 85 years in Sweden. The elderly
population ratio currently stands at 23 percent (as of 2011), which puts Japan among the
nations with the highest longevity in the world (Chart 3). Reflecting both the rapid decline in
the fertility rate and the rapid pace of aging, Japan entered the demographic dividend period
around 1955 and transitioned into the demographic burden period around 1995. Thus, Japan
is already more than 15 years into the demographic burden period (charts 4 and 5).
C. Demographic changes occurring in Asia
Now, let us look at demographic changes in other Asian economies. In contrast to Japan,
most Asian economies are still enjoying the demographic dividend period (Chart 5). Asia's
remarkable economic success is widely attributed to an emphasis on education, high savings
and investment ratios, export-oriented economic growth strategies, government-led industry
promotions, and various measures to attract foreign capital. In addition, the availability of
low-cost labor owing partly to the demographic dividend period has not only supported
successful economic performance, but has also attracted Japanese outward foreign direct
investment (FDI) to the region since the 1980s.
However, divergent features related to demographic changes have recently begun to emerge
in Asia. I think that the economies of the region can be divided into two groups: one group in
an advanced stage of demographic change (the so-called "advanced group") and a second
group at a less advanced stage (the so-called "follower group").
Advanced group economies approaching the end of the demographic dividend period
The advanced group includes the so-called newly industrialized economies (NIEs), which
industrialized and achieved high economic growth much earlier than other Asian economies.
The NIEs - which comprise Hong Kong, South Korea, Singapore, and Taiwan - experienced
a rapid decline in the ratio of the young population to the total population due to a decreasing
fertility rate in the 1970s. The group also includes China and Thailand. Hong Kong entered
the demographic dividend period by 1965; South Korea and Singapore followed by 1970,
Thailand by 1975, and Taiwan and China by 1980.5 Hong Kong and South Korea will exit the
demographic dividend period and enter the demographic burden period during 2010-15
(charts 5 and 6). China, Singapore, Taiwan, and Thailand are likely to exit the demographic
dividend period by 2015. All economies in the advanced group will enter the demographic
burden period by 2020.
When the demographic dividend period ended around 1990, Japan's per capita income had
already reached about 27,000 U.S. dollars - a level that ranked it among the high income
economies. Similarly, the NIEs are likely to enter the new stage of demographic burden with
per capita incomes already above 20,000 U.S. dollars. Economies with high income levels as
well as an adequate social capital infrastructure and social security system will be better
prepared to cope with aging-related challenges.
In contrast, China is projected to enter the demographic burden period when its per capita
income remains in the range 8,000 to 10,000 U.S. dollars (according to the projection of the
International Monetary Fund [IMF]) - the level that defines a medium income economy. This
reflects the effect of China's one child policy in rapidly reducing fertility rates since its launch
in 1979 and the decline in the youth population ratio from around 1980 (Chart 6).
Simultaneously, rapid aging has already made China an aging society, and the elderly
population ratio surpassed the 7 percent threshold by 2000. This means China is likely to
face aging-related challenges before it builds an adequate social capital infrastructure and
social security system. Unless the country can increase the workforce participation of the
elderly, the substantial cost of aging may be borne by the government and younger
generations. The ratio of the elderly population to the total population is only about
10 percent in China, which is well below the ratios of Japan (23 percent in 2011), Hong Kong
(13 percent in 2010), and South Korea (11 percent in 2010). However, China is unique in the
sheer size of its elderly population (about 100 million). Like China, Thailand is also likely to
end its demographic dividend period while its per capita income remains at a medium level.
Follower group economies enjoying the demographic dividend period
The follower group also experienced a decline in the youth population ratio since the 1970s
and an increase in the elderly population ratio since the 2000s, but this group is likely to
continue to enjoy the demographic dividend period for decades to come (Chart 5). The
demographic dividend period began in India, Malaysia, and the Philippines by 1970 and in
Indonesia and Vietnam by 1975. The demographic dividend period is likely to end in
Indonesia by 2025, Vietnam by 2035, India by 2040, Malaysia by 2045, and the Philippines
by 2050. These economies face a slower decline of the youth population ratio and a slower
pace of aging than economies in the advanced group (Chart 7). Differences in fertility rates
and life expectancy at birth cause different demographic patterns.
III. Demographic changes and expenditure patterns in Asia
The aforementioned demographic changes affect macroeconomic performance in various
ways. Typically, they affect economic growth through movements in labor supply, savings,
and investment. Demographic changes also affect the sustainability of the fiscal balance and
social security system. Today, I want to focus on the impacts of demographic changes on
consumption movements.6
A. Japan's expenditure patterns
Having outlined demographic trends, I would now like to talk about historical movements of
household consumption in Japan. Based on time series data from the 1950s, per capita
domestic final household consumption expenditure appears positively correlated with
per capita GDP or per capita disposable income. Per capita consumption expenditure rapidly
expanded from the 1970s to the 1980s, when per capita income grew rapidly. The aggregate
consumption expenditure data also exhibited an expansionary pattern, partly due to
population growth. This suggests that a country experiencing rapid income growth is also
likely to see rapid consumption growth. However, once per capita income reaches about
3 million yen on a GDP basis - or 2.5 million yen on a disposable income basis -
consumption appears to level out (Chart 8). This may reflect that Japan's average income
level has become comparable to other advanced countries and so marginal consumption
demand has weakened. Regarding future trends, the consumption level may decline as the
decline of Japan's total population from 2011 reduces the total number of consumers.
Next, I want to explore the impact of demographic changes on consumption patterns. As the
average income level in Japan rose, expenditure on durable consumption goods also
increased. This trend was observed for (a) transportation equipment (including passenger
cars) and (b) TVs and information/communication equipment (Chart 9). Particularly,
expenditure on transportation equipment rose rapidly in the second half of the 1980s,
probably reflecting a shift in consumer preferences from motorcycles to passenger cars and
from low-quality cars to high-quality cars. Since then, expenditure on durable consumption
goods has flattened. The number of new passenger-car registrations has declined
moderately in recent years (Chart 10). The population's declining trend that started in 2011 is
likely to reduce the sales volume of durable consumption goods.
B. Age-driven changes in Japan's consumption structure
While consumption appears to have peaked owing to the constraints imposed by
demographic changes, it is important to pay attention to the changing characteristics of the
consumption structure. First, the elderly are becoming a major consumer generation. The
share of consumption by households whose heads are aged 65 and over has been rapidly
rising and already accounts for more than 30 percent of total consumption (Chart 11). If
households whose heads are aged 60 and over are added, the share of consumption by
elderly households exceeds 40 percent of total consumption. According to analysis based on
household survey data, elderly households tend to allocate a greater proportion of their
consumption to medical and nursing services, tourism, social expenses, and foods than
younger households. Meanwhile, elderly households spend less on education and
transportation/communication (including passenger cars) than younger households. These
consumption patterns make sense since many elderly households have already completed
child rearing. Other data show that medical and nursing related expenditure in Japan
increased cumulatively by more than 30 percent between 2000 and 2010. This increase is
larger than in other advanced countries. For example, the cumulative increase during the
same period was 25 percent in Germany (with an elderly population ratio of 20 percent),
11 percent in France and the United Kingdom (each with 18 percent), and 16 percent in the
United States (13 percent).
In other words, the market for goods and services targeting the elderly is likely to expand
further as the population becomes more aged. The elderly population generally has lower
income from earnings than the working-age population. However, the elderly population is
often observed to have more varied consumption preferences and tastes, reflecting divergent
asset sizes, health conditions, and living environment compared with the younger generation.
Given the large and diverse potential demand of the elderly population, firms can pursue new
business opportunities involving high quality goods and services that meet this demand.
Furthermore, I would also like to look at the pattern of residential investment - a major
investment item for households - although it is not regarded as consumption. The size of the
working-age population is positively correlated with total housing investment. Chart 12 shows
that private housing investment has clearly declined since the mid-1990s, when the
working-age population began to decline. In the present era of declining population, the
number of residential investment projects is unlikely to grow much. Instead, demand growth
in housing is likely to come from renovation of existing houses or the purchase of new
houses that are suitable for elderly persons or located in convenient urban areas.
Thus, I want to emphasize that the aging population can create new business opportunities
for Japanese firms if they develop ways to tap this potentially large consumption market.
C. The case of the NIEs: transforming to an aging society
What about the consumption patterns of the NIEs in the advanced demographic group? As I
have highlighted, since these economies already have high incomes, their consumption is
likely to grow further in the near future, as Japan previously experienced. According to the
historical data, Japan's ratio of household consumption expenditure to GDP dropped from
the 1950s to the 1960s. This happened because GDP growth exceeded consumption
growth. However, the ratio resumed a positive trend from the 1970s, when per capita income
rose rapidly (Chart 13). Thus, the ratio of consumption to GDP has room to grow as per
capita income increases.
Moreover, the life-cycle hypothesis indicates that the national savings rate is likely to decline
and the consumption-GDP ratio is likely to increase as the elderly population grows.7
Thus,
countries with large populations of youth and elderly tend to have a lower national savings
rate than those with large working-age populations. In particular, the increase in the elderly
population, whose life expectancy has been increasing, is likely to further reduce the national
savings rate.
Most Asian economies are still enjoying the demographic dividend period, and population
aging has not progressed as far as in Japan, Europe, and the United States. Therefore, their
consumption-GDP ratios tend to be much lower than those of the advanced economies
(Chart 14). Above all, Asia is well known for having a higher propensity to save than any
other region of the world. This saving habit not only stimulates investment but also creates a
large current account surplus. Hong Kong is the most aged economy among the NIEs and is
second to Japan in Asia, and its ratio of elderly persons to the total population approached
14 percent in 2010. Hong Kong's consumption-GDP ratio declined in the 1970s, but has
increased since the late 1980s. As for South Korea, the consumption-GDP ratio remains low,
but has increased during the 2000s. Singapore's consumption to GDP ratio shows no signs
of increasing. China and Thailand have shown divergent patterns despite their similar income
levels. Overall, a clear rising trend is observed only for Hong Kong.
Nonetheless, the consumption-GDP ratio in the NIEs is expected to grow further in the near
future, as aging accelerates in the region. The Asian Development Bank (ADB) has
conducted an interesting analysis on this subject.8 The study found that the impact of aging
on the consumption-GDP ratio (or on the savings-GDP ratio) is smaller (or larger) in Asia
than elsewhere. However, it also found that the consumption-GDP ratio tends to increase in
Asia when population aging reaches a certain point. Asia's relatively low consumption ratio
may reflect that the pace of aging is slower there than in other regions: for example, the
report mentioned that the elderly population ratio is only 9 percent in Asia compared with
12 percent globally. Namely, the presence of a relatively large working-age population in
Asia supports the tendency to save rather than consume.9 The ADB concluded that the
Asian region is unlikely to stably expand consumption and domestic demand in the near
future, since many economies remain in the early demographic dividend period. In other
words, it may take time for the region to reduce its current account surpluses - mainly
caused by high saving rates - or re-balance the saving-investment relationship.
In the Asian region, the NIEs are likely to re-balance the saving-investment relationship and
experience increased demand for services, particularly since their faster aging may stimulate
demand for related services.10 The demand for a better social security system may also
encourage the government to provide more services for the elderly. The elderly population
ratio in these economies is expected to reach a level comparable to the advanced countries
by 2030. Thus, Japan, as a leader in the aging trend, may be able to develop creative goods
and services that cater to the demand of the elderly population, which may eventually find
markets in other aging countries. Given that the service sector is increasingly
internationalized and tradable, penetration into other countries could happen relatively
rapidly.
D. The case of China: rising income and growing consumption market
China has developed its economy as a center for industrial production in the Asian region by
utilizing its large pool of low-cost labor from rural areas. Thus, wage growth has long lagged
labor productivity growth. The resultant low unit cost of labor appears to have contributed to
household consumption growth lagging GDP growth (Chart 14). In recent years, the supply
8
See Estrada, Gemma, Donghyun Park, and Arief Ramayandi, "Population Aging and Aggregate Consumption
in Developing Asia," ADB Economics Working Paper Series No. 282, 2011.
9
As one of the factors contributing to the relatively low consumption-GDP ratio in Asia, it is noted that elderly
persons in other regions tend to depend more heavily on pension benefits and income support provided by the
public sector, while those in Asia tend to accumulate savings and assets prior to retirement. See Lee,
SangHyop and Andrew Mason, "The Economic Life Cycle and Support Systems in Asia," ADB Economics Working
Paper Series No. 283, 2011. In other words, the Asian region tends to save more under an inadequate social
security system and social capital accumulation.
10
The share of services in GDP is found to be positively related with the level of per capita income. Eichengreen
and Gupta (2009) identified two waves of service sector growth: the first is related to lodging, meal
preparation, housecleaning, and beauty shops, which typically generate moderate growth until per capita
income level reaches about 1,800 U.S. dollars; the second is related to financial services, computing,
communication services, and business services, which support accelerating growth once income reaches
about 4,000 U.S. dollars. See Eichengreen, Barry and Poonam Gupta, "The Two Waves of Service Sector
Growth," NBER Working Paper No. 14968, 2009. I believe there follows a third wave of service sector growth,
based on aging-related services.
of low-cost labor from rural areas has become limited. As a result, minimum wages have
been rising in many areas. Further tightening of the supply-demand balance in low-cost labor
is expected to ensure continuous wage growth, raising per capita disposable income and the
presence of middle class income earners. The further deregulation of financial and capital
markets may strengthen those markets and help the middle class accumulate financial
assets. All these factors are likely to contribute to near term consumption growth.
If this growth happens, households are likely to expand demand for durable consumption
goods (such as cars, air conditioners, microwaves, etc.); demand for such goods has high
income elasticity. Residential investment is likely to follow this trend. According to "China
2030," a report compiled by the World Bank and China's Development Research Center of
the State Council, China is projected to experience rapid urbanization - the nearly 50 percent
of the population living in cities in 2009 will increase to nearly two-thirds by 2030.11
This
implies about 13 million new urban residents each year - comparable in scale to Tokyo. It is
reported that the 20 fastest-growing cities in China are located inland, and per capita
incomes in the interior cities are rapidly catching up with the coastal cities. If urbanization is
accompanied by better infrastructure, demand for passenger cars is likely to increase
substantially given the low car ownership rate. Accordingly, demand for better public
services, recreation activities, education, and financial services is likely to grow further. The
aforementioned report projects that the share of industry to GDP will shrink constantly from
44 percent in 2015 to 41 percent by 2020, 38 percent by 2025, and 35 percent by 2030. This
may imply that some production locations may shift to other Asian economies enjoying
longer demographic dividend periods.
Since it takes time to strengthen social capital infrastructure and the social security system,
the consumption-GDP ratio may not rise as rapidly in China as in other countries even if the
pace of aging accelerates. However, the aforementioned report projects that greater upward
pressure on wages and the resultant rising share of household income in GDP will eventually
reverse the steady decline in the share of household consumption in GDP. Accordingly, the
share of services in GDP is also projected to grow steadily from 48 percent in 2015, to
52 percent by 2020, 56 percent by 2025, and 61 percent by 2030. Meanwhile, the
investment-GDP ratio is expected to decline from 42 percent in 2015 to more sustainable
34 percent by 2030.
It is important to note that these projections are based on the assumption that China will
implement necessary structural and policy reforms to promote a more market-oriented,
innovative economy and maintain high productivity to generate economic growth. China also
needs to implement measures to facilitate the portability of pension and social security rights
and to further reform the hukou system. Also, the retirement age needs to be extended from
60 years old for men and 55 years old for women, and elderly workers require employment
opportunities and job training.12 The one child policy also needs to be further adjusted.
In Japan, it only took 25 years for the elderly population ratio to increase from 7 percent to
14 percent, much faster relative to European countries. While the same period for a shift
from 7 percent to 14 percent is projected in China, some believe that it could be even
shorter. Thus, China faces many forthcoming challenges from its rapidly aging society.
IV. Japan's structural problems and the outlook for economic activity and prices
In the first part of my presentation, I talked about past, current, and projected demographic
changes in Japan and other Asian economies, as well as related shifts in consumption
patterns. In the next section, I will shed light on the outlook for Japan's economic activity and
prices. But, before that, I would like to point out various structural changes, including
demographic changes, which have affected the environment surrounding monetary policy
management.
A. Why are the structural issues so important?
As mentioned earlier, demographic changes are one of the most important ongoing structural
issues faced by Japan. Simultaneously, other advanced countries, especially in Europe,
have begun to recognize these changes as important medium-term structural issues.
Recently, some central banks have increasingly confronted the need to better understand the
impact of demographic changes on macroeconomic performance and even on the
environment surrounding monetary policy management.
Globally, Japan is taking the lead in dealing with demographic trends and associated
macroeconomic issues. It is well known that Japan has seen a reduction of its working-age
population in absolute terms since the mid-1990s. The trend of a declining total population
began from 2011. As a result, Japan has become the furthest progressed aging society
globally. The rapid reversals in the growth rates of the working-age population and total
population seem unprecedented globally. This demographic trend has already exerted
various negative impacts on Japan's macroeconomic performance, and thus it is important
for the Bank of Japan (hereafter called "the Bank") to consider new impacts on the
environment surrounding monetary policy management.
Let me give you one example. Japan's output gap (or the aggregate demand and supply
balance) has remained negative almost continuously since the mid-1990s. Generally, the
negative output gap is regarded to be caused by cyclical factors or temporary shocks to the
economy (such as natural disasters). However, in the case of Japan, structural factors have
also contributed to the long-standing negative output gap. In regard to cyclical and temporary
factors, the output gap has deteriorated following a series of domestic and external shocks -
such as the collapse of the asset bubbles in the early 1990s, the Japanese financial crisis
and East Asian currency crises in the second half of the 1990s, the collapse of the IT bubble
in the United States during the early 2000s, the global financial crisis of 2008, the European
sovereign debt problems since 2010, the Great East Japan Earthquake and the Thailand
floods of 2011, and the spreading effects of recent developments in the relations between
Japan and China. These continuous shocks have prevented the negative output gap from
narrowing quickly.
On the other hand, Japan faces various structural issues including the already-mentioned
demographic changes and growing global competition. The aging population has contributed
to the long-term slowing of economic growth. Thus, it is important to conduct structural
reforms to strengthen the potential for economic growth by enhancing productivity growth of
the working-age population while increasing the labor participation rates for women and the
elderly. However, the implementation of the necessary structural reforms for boosting growth
and productivity has been sluggish. Issues related to mounting government debt and social
security reforms have also generated uncertainty over the economic outlook. In this
environment, firms may form a pessimistic medium- to long-term outlook on their market
growth while households may come to more strongly expect limited future income growth.
Consequently, firms and households may become cautious in expanding current investment
and consumption activities. If the adjustment of current production capacity by firms in
declining industries and their entry into newly emerging or promising industries occur very
slowly, these structural factors may persist and cause long-standing sluggish domestic
demand. This slows the narrowing of the negative output gap. These structural factors have
also contributed to generating depressed prices.13
Nonetheless, I remain optimistic that deflation can be overcome in the medium term. This is
because many Japanese firms are striving to become more innovative and competitive, and
to explore new sources of demand, both at home and abroad. With their high technology
level and experience, I believe Japanese firms can take the lead in developing innovative,
higher value-added goods and services in the areas of robotics, medical treatment and
elderly care, medical supplies, biotechnology, energy-savings, etc. Many newly-developed
goods and services are likely to contribute to creating a more convenient, comfortable life for
the elderly. Such business opportunities can also be explored globally - especially in Europe,
where the pace of aging is rapidly progressing, and in the high-income aging economies in
Asia.
In line with this view, the government is also expected to support the business community by
creating a more business-friendly environment. Financial institutions are expected to provide
diverse, new types of financial support to innovative, viable firms that tap into growing
demand. Under this environment, the Bank will continue to support the business community
by ensuring an accommodative monetary environment and providing long-term funds
through financial institutions (as explained later). Therefore, I would like to emphasize that
the baseline scenario of the outlook for Japan's economic activity and prices, which I will
introduce shortly, is based on the assumption that various agents are making the expected
efforts.
B. The statement "Measures aimed at overcoming deflation," jointly released by
the Japanese government and the bank of Japan
Based on the perspectives presented previously, I feel that the statement "Measures Aimed
at Overcoming Deflation," jointly released by the Bank of Japan Governor Shirakawa,
together with Mr. Maehara (Minister of State for Economic and Fiscal Policy) and Mr. Jojima
(Minister of Finance), is very significant. Given that deflation is a long-standing, structural
challenge, it is important that both the Bank and the government confirm their mutual
understanding of the causes of deflation and measures to overcome it.
On the one hand, the Bank will continue to pursue its CPI-based inflation goal of 1 percent
annually, given that the medium- to long-term price stability goal is set within 2 percent
annual inflation. A monetary easing policy - based on the virtually zero interest policy and
the Asset Purchase Program - will be pursued until the 1 percent inflation goal is in sight.
Simultaneously, the government is expec