Immigration Is The Real Key To Japan’s Revival

“I’m back! And so shall Japan be!” was the key message of Japanese Prime Minister Shinzo Abe when he addressed the Center for Strategic and International Studies (CSIS) in Washington, DC, on February 22 (transcript and video available here). He also stated that “Japan is not, and never will be, a tier-two country”. Towards the end of his speech, Abe stated that he wanted to make Japan the second-largest emerging market in the world, after “Middle America”.

These are all lofty goals, especially since many observers believe that Japan has experienced two ‘lost decades’ of economic growth and has become less relevant to the world.

Abe is indeed back, but for how long? Japanese premiers have notoriously short tenures, with Abe the seventh incumbent in less than six years. The main reason for the rapid turnover is that prime ministers come under pressure to resign if their approval rating falls below 25%; this usually happens within a year of taking office, due to disappointment with each leader’s handling of the economy.

Abe may last longer this time – he is the first Japanese PM since the late 1940s to be given a second chance – but can his mix of ultra-loose monetary policy, a weaker yen, and higher spending (dubbed ‘Abenomics’) really revive Japan?

Is Japan Really ‘Back’?

My colleagues and I are sceptical. It’s true that the Nikkei index has surged by 32% since late last year thanks to ‘Abenomics’, but these stimulants appear to be only a short-term fix. There are several key reasons why Japan’s economy has performed poorly since the early 1990s, but one of the major factors is demographics.

Japan’s population is shrinking (notwithstanding the fact that the average Japanese resident has gotten bigger in recent decades) and ageing rapidly. The government reckons that the population could fall by 32% to 87mn by 2060. Meanwhile, the percentage of the population aged 65 and above is forecast to rise to 35-40%. These dynamics point to fewer producers, fewer consumers, and higher expenditure on health and welfare, as opposed to investment.

In our view, the surest way Japan can overcome these problems is to allow greater immigration to rejuvenate and ‘top up’ its population – something that Abe’s Liberal Democratic Party acknowledged in June 2008, when a group of legislators argued for the country to take in 10mn immigrants and become a multiethnic society by 2050.

However, no action has been taken on this front. In fact, Japan’s foreign population peaked at 2.2mn in 2008 and has declined slightly since then, due to the severity of the 2008-2009 downturn and the Tohoku earthquake-tsunami-nuclear triple disaster of 2011.

In a special feature on immigration and the Japanese economy published in Business Monitor Online this week, we outline:

  • The reasons why Japan’s population dynamics are negative for its economy and global influence
  • Possible ways in which Japan can offset the above dynamics, in the absence of mass immigration
  • The ways in which the economy could benefit from immigration
  • The main obstacles to seeing greater immigration in Japan, and how they are being challenged

The Relevance Of Japan’s Demographics For The World

The future of the Japanese population has relevance for the world for three key reasons:

First, Japan is still the third-largest economy in the world. Its fate matters to Asian countries and the global economy, particularly in terms of trade and investment.

Second, Japan is the most indebted mainstream economy in the world (public debt is 220+% of GDP, far more than any eurozone country). The ageing of the population could bring forward a fiscal crisis of catastrophic proportions in Japan.

Third, many countries are following in Japan’s demographic footsteps, albeit still some way behind. South Korea, Taiwan, Hong Kong, Singapore, and even China will experience the same ageing phenomena as Japan, and so too will many Central and Eastern European states. Even ‘younger’ countries such as Mexico, Turkey, and Iran will eventually see their populations age. Therefore, how Japan deals with this issue will be closely watched by governments worldwide.

The stakes are high for Japan. If it fails to enact a sustainable economic revival, it risks falling further behind other developed and emerging nations in global significance.

This blog is tagged to:
Sector: Country Risk
Geography: Asia, Japan

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