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Japan is showing the world's economies how to age gracefully
James Pethokoukis is a senior fellow at the American Enterprise Institute and author of 'The Conservative Futurist.'
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 civilizations 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 aging economy can still offer growth and prosperity.
Japan's falling birth rate has been treated as a national crisis both inside and outside the country for decades. The negative effects are visible enough: Rural Japan is hollowing out, offering a melancholic tableau that's great for TikTok doomscrolling: closed schools, shuttered shops and an abundance of abandoned homes, or 'akiya.' Perhaps you've heard about the village of Ichinono, where the remaining 60 or so residents craft and publicly display life-size puppets, a wistful echo of a more populous past.
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 percent in the 2010s to 1.2 percent in the 2020s, while core inflation has climbed from 0.5 percent to a healthier 1.5 percent, 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 U.S.-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 labor-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.
Even if we do find ways to boost marriage rates and fertility at the margins, bigger changes would require a massive cultural shift. The religiously observant maintain higher birth rates; a Gen Z faith revival might prompt a revival in fecundity. People with higher incomes are having more children lately; an AI-led economic boom might build on this trend. And you never know, some futurists think a Muskian breakthrough in space travel might rekindle a sense of purpose for those eager to populate the new colonies.
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 emphasize 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 labor market that maximizes 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.
