James Pethokoukis: Japan baby slump might not be an economic disaster

West Australian

26-06-2025

Economic coverage of falling birth rates these days sounds like a CNBC adaptation of the 2006 dystopian thriller Children of Men, a film about societal meltdown in a childless future. Income growth will stall! Innovation will wane! Consumer demand will falter!
'This is how great civilisations throughout history have ended,' Elon Musk warned in one of his many grave pronouncements about 'population collapse.'
As this stagnation scenario becomes the default economic forecast, governments around the world are scrambling for ways, often at great fiscal cost, to slow or even reverse their baby busts. From cash incentives to paid leave, the results have been disappointing, and there's little sign of a promising untried fix waiting in reserve.
Yet Japan, 17 years into population shrinkage despite its own attempts at pricey natalist policies, now offers a surprisingly hopeful counter that an ageing economy can still offer growth and prosperity.
The data, however, tells a more upbeat tale (if without any Miyazaki whimsy). A Goldman Sachs analysis this year found that wage growth has risen from 0.3 per cent in the 2010s to 1.2 per cent in the 2020s, while core inflation has climbed from 0.5 per cent to a healthier 1.5 per cent, an encouraging development in a country that was long stuck in a deflationary trap.
As Goldman sees things, the demographic decline that once drained vitality is now creating a 'virtuous cycle' of tightening labor markets, increased worker bargaining power and more investment in productivity-enhancing tech. These trends are helping prop up the economy even as it weathers a shock from the US-led trade war.
When Japan's population peaked in the late 2000s, the country initially offset the decline by drawing more women and older people into the workforce. Rising participation helped mask demographic pressures and kept wages subdued. Now, Japan is running out of workers to tap, and scarcity is finally exerting upward pressure on wages, a boon for the remaining labor force.
But rather than just grumbling about the lack of workers, businesses are finding ways to use fewer of them. From software to machines — here's where AI and robotics can really lend a hand — productivity has gone up in Japan's most labour-starved sectors, with corporate profits hitting record highs in fiscal 2024.
Recent performance doesn't guarantee long-term results, as the report cautions. Still, the Japan scenario seems a more promising path forward than further natalist nudges. Hungary's lavish baby bonuses and generous parental benefits in Scandinavia have barely budged birth rates, proving again that you can't fight a values-based war with economic weapons. Cash-for-kids advocates Musk and JD Vance would protest, but no financially feasible subsidy can compete with 21st century attitudes about families, career priorities and life goals. A survey by Pew Research Center this month finds that younger Americans report wanting dramatically fewer children than even just a decade ago.
These are fun scenarios to contemplate, but they offer little guidance to policymakers grappling with population trends staring them in the face right now. Accepting a Japan-like fate as a manageable result might encourage policies that help better adjust to it.
We could emphasise productivity — the business investment provisions in the Senate tax bill would help here, but so would retooling immigration to focus on letting in the smartest, highest-achieving workers. We could encourage a labour market that maximises mobility so the right person is in the right job in the right place, perhaps by easing occupational licensing requirements and providing vouchers for job relocation. And there's no time like the present to reform pension systems to reflect the new reality of longer lives and shrinking workforces.
If a country that's considered an archetype of demographic decline
can
go gently into that good night, so, too, might the United States and other rich countries. Like the willow in the wind, better to go with the flow than fight against it.
James Pethokoukis is a senior fellow at the American Enterprise Institute and author of 'The Conservative Futurist.'