Japan: The Old Weigh On the Young and the Economy
As we noted in 2009, Japan has an incredibly old population … which will put an increasingly heavy burden on the economy:
Franco Modigliani won the Nobel Prize in Economics 1985, partly for his “life cycle hypothesis“, which states that spending and savings patterns are predictable and largely a function of age demographics. In other words, Modigliani’s hypothesis is basically that age demographics largely determine the health and robustness of an economy.
Specifically … the basic health of any country’s economy is largely driven by the number of its citizens who are in their peak spending years.
For example, the peak Japanese spending range has been estimated to be comprised of 39-43 year olds. The more 39-43 year olds Japan has at any given time, the more consumer spending there will be, as these are the folks who are the big spenders in Japan. Dent argues that the Japanese economy will tend to grow when the number of 39-43 year olds grows, and to shrink when it shrinks.
Countries with a large percentage of elderly people and a small proportion of productive workers will have less productive output and a larger demand for social services than those with a higher percentage of workers. It should also be obvious that this will tend to drag down the economy.
Japan has the worst demographics of all, with a staggering percentage of elderly who need to be taken care of by the young:
Chart 2: Old Age Dependency Ratios for Selected Countries
Business Week gives an update:
Last year, for the first time, sales of adult diapers in Japan exceeded those for babies.
Given its quickly-aging population, Japan will have a hard time competing with younger countries like China, Brazil or India.
Brazil has a much younger age demographic.
And India’s is even younger than Brazil’s.