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Japanese economy needs to overcome shrinking population and poor productivity

Japan’s economy faces uncertain times. Although the third largest, it’s suffering from structural problems that are holding back growth and productivity. GDP per capita is the second lowest in the G7, while productivity is two thirds of the G7 mean.

Japanese economy third largest, second least productive
Japanese economy third largest, second least productive

The most significant challenge facing the country is the decline of its population. Currently around 126 million, it’s expected to shrink by 3 million in the next 5 years, and 30 million before 2050. It isn’t only the shrinking numbers that are of concern, the population is ageing fast, removing people from the workforce far faster than they’re being replaced. The current workforce is approximately 66 million, with this projected to fall to 44 million by 2050.

Japanese population is falling fast
Japanese population is falling fast

Falling population could bring benefits to workers. Concern has been growing about worker rights, and in particular the long hours that Japanese employees put in. A typical Japanese will work 1,706 hours each year, 50 hours more than the G7 mean. Not only is this contributing to low productivity, it’s also played a part in reducing the birth rate. Workers are shunning relationships, marriage and children. Government and business have begun to address this, aiming to reduce worker hours.

Japanese companies appear to be targeting working hours similar to the current mean within the G7. Assuming the country can meet its economic growth expectations ($6.8 trillion), that would return productivity at twice the current rate.

Japan economy in 2050
Japan economy in 2050

Whether it can meet these targets is by no means certain. Heavily dependent on exports, the country is exposed to global economic shocks, and has been affected by US protectionism and the growth of heavy industry across the East Asian region. There is also growing national debt, currently the G7’s largest at more than 2.5 times its GDP. At some point the debt will need to be repaid, which will bring heavy tax demands on its shrinking population.

Sources: OECD, IMF, World Bank, PwC

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Japanese economy needs to overcome shrinking population and poor productivity

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