The Grey Zone – in a country near you!

Japan is an ‘ultra-old’ country. This article appears in today’s FT (Lex) and shows the nightmare situation that can (will) arise unless governments take action to prepare for the effects of an aging population.

It is interesting that in the French referendum there was not a word of debate about the issue of population aging, yet France is rapidly heading the same way as Japan. In the US, the country where French politicians on both sides of the referendum debate continually ridiculed, the top domestic priority is to prepare the government finances for effects of demographic change, even though their effect is far less than in France. OK, political rant over. Here is the full text of the article:

“Japan is boldly going where much of Europe will shortly follow: into the grey zone. The population is expected to peak next year. From 2007, the first wave of baby boomers will start retiring shaving an estimated annual 0.5 per cent off gross domestic product. Can Japan, one of the developed world's most indebted countries, take the strain?

Initially, there should actually be a benefit. Consumption ought to rise as retirees turn spenders, whittling down their $1,550bn of financial assets. Also, those aged between 55 and 59 command big salaries, totalling about $150bn a year. Stripping these out should temporarily lift corporate profitability.

Longer term, however, the picture looks grim. Japan has few options to replenish its workforce. It cannot afford European-style tax incentives to increase birth rates. It is reluctant to relax tight immigration rules. Even bringing more women into the workforce (female participation is low at 41 per cent) would necessitate spending more on childcare provision. So, wage pressure is likely to return.

At the same time, productivity growth never too strong in Japan could falter as the highly skilled baby boomers retire. Already, increasing use of part-time workers is encouraging companies to cut training budgets, eroding skills further. Increased automation could take up some of the slack. But companies worried about another feature of Japanese demographics a dwindling pool of consumers are less inclined to undertake hefty IT spending.

It is not only corporate Japan that should fret. The government has issued over $300bn a year in fresh debt since 1998. A large chunk of this was needed merely to serve interest on existing debt. But now the bills are swelling; welfare and pension payments are expected to double between 2004 and 2025, so new sources of revenue will have to be found. The preferred option appears to be a rise in consumption tax. But a similar move killed off one nascent economic recovery in 1997. Japan's future looks grey in more ways than one.” Dick Stroud www.20plus30.com