Economics - General Public Policy

Japan: Bigger deficit problems than the U.S.

The cover of The Economist this week looked at America’s budget deficit.  According to their estimates, “America’s budget deficit in the fiscal year that ended on September 30th stood at $1.3 trillion; at 9% of GDP, the second-largest since the second world war.”  The short run cause of this deficit is the recent severe recession, the wars in Iraq and Afghanistan, and the stimulus spending.  In the long run, however, entitlements will further destabilize the country’s fiscal soundness.  Entitlements such as Social Security, Medicare and Medicaid “…will double the federal debt by 2027; and the number keeps on rising after then.”

Nevertheless, the prospects for Japan look even bleaker.  While the U.S. debt has exceeded 50% of GDP, Japan’s debt is near 200% of GDP.  Further, Japan is aging quickly; the median age in Japan is 44.6.  Although a long life expectancy is a good thing, it will be difficult to support so many older workers without a concurrent rise in the number of workers.  Since the birth rate in Japan is so low (2nd lowest in the world), fewer and fewer youth are entering the job market.  More immigration could help, but it is currently difficult for non-Japanese immigrants to gain citizenship even after working in Japan for many decades.

More from the Economist:

Many in Japan shrug off the problem of ageing. That is partly because the elderly continue to live comfortably on their vast hoard of savings. Even though the number over 65 has doubled in 20 years, Japan’s health-care system remains one of the cheapest and best in the rich world. And its economy, though it has now been overtaken in size by China’s, remains home to a huge industrial apparatus with the innovative clout to make life easier for its elderly citizens…

Yet what Japan fails to appreciate is that, as the years pass, its economic ailments are being compounded by skewed demography. Unless the country acts to tackle this, its decline will become intractable—for three reasons.

These include:

  1. Fewer workers. The working-age population, aged 15-64 is expected to fall from a peak of 87m in 1995, to about 52m by 2050.
  2. More elderly to support.  Ten years ago each person in retirement was supported by four in work. In ten years that burden will fall on only two workers.
  3. Shrinking demand.  Shrinking demand “…lower[s] Japanese firms’ appetite for risk and thus their willingness to invest. In growing markets, companies can afford to risk over-investing, because excess capacity is eventually mopped up. But amid shrinking populations, that logic is turned upside-down. Firms not only need to export more or build fewer factories; they may have to destroy idle ones.”

On the positive side, “Japan’s health-care system remains one of the cheapest and best in the rich world.”

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