Japan seems to be finally rising out of the so-called “lost decades”. The turn-around is result of a completely new economic policy. Japan must change its social institutions, and perhaps values, in order to complete the transition. The change also requires Japan to go boldly where no society has gone before by building new economic and political institutions. Japan has the lowest fertility rate in the world, and the highest life expectancy. This implies it is aging faster than any other nation on earth. However, the country’s social systems were established in the years immediately following World War II and suited a very young and growing population. Institutions that had functioned well under a growing supply of labor in expanding markets, such as social security schemes, labor market practices, and the political system, failed to adapt. Life-time employment made it safe for workers to accumulate firm specific capital and firms were willing to invest in on job the training knowing they would be able to collect the returns. Because the economy and the market were expanding, firms were also expanding, which made it possible to promote everyone. At the macroeconomic level, on the job training contributed to Japan’s speedy technological catch-up.
In addition, the shifting age structure worked against badly needed economic adjustments, insofar as resources continued to be directed toward the aging members of society. The burden of old-age support has become the responsibility of the relatively small young cohorts, creating a situation that is very difficult for the society to correct. Japan’s traditional respect for the elderly means that taking resources away from the old is socially unacceptable; it is also politically difficult, because the older generation forms a very large voting bloc.
There are several possible institutional changes that can be adopted or are in the process of being adopted. The labor market is becoming more flexible, although the social security system has not kept pace, which has led to hardship for many young workers. The limited supply of labor has forced society to accept more foreign workers and the female labor participation rate is now over 60%. Furthermore, the fertility rate has stopped declining, which suggests there are some fundamental institutional and value changes underway.
There is need for even more changes, including in the political system. The mismatch between the social reallocation of resources, such as pensions and education, and political representation where not all parties are represented, has been echoed in other developed economies. The solution may be to lower the voting age or even give children a vote (proxy vote for parents). Being the leader in the new socio-economic order, Japan’s new social and economic institutions may be able to both address the current demographic challenges and incorporate possible interventions that might yield better outcomes: some of them specific to Japan, others that would apply to any aging society.
Aoki, R., (2013)., “A Demographic Perspective on Japan’s Lost Decades,” in Geoffrey McNicoll, John Bongaarts, Ethel P. Churchill, eds. “Population and Policy: Essays in Honor of Paul Demeny,” Population and Development Review 38 Supplement,:103-112.
Demeny, Paul. (1986). “Pronatalist policies in low-fertility countries: Patterns, performance and prospects,” Population and Development Review 12(Supp.): 335–358.
Vaithianathan, R., Aoki, R. and Sbai, E., (2013). “Support for Franchise Extension from Children: Evidence on Japanese Attitudes to Demeny Voting, “ CIS Discussion Paper No.610. Center for Intergenerational Studies, Hitotsubashi University, Tokyo. http://cis.ier.hit-u.ac.jp/Japanese/publication/cis/dp2013/dp610/text.pdf