NCPA - National Center for Policy Analysis


August 7, 2009

If the combination of Japan's perilously low birth rate with enviably healthy lifestyles and high-quality health care is not addressed in time, this demographic double-squeeze threatens to be a fiscal disaster that could derail Asia's leading economy, says the Financial Times (FT).

Doom already seems inevitable to some analysts:

  • Since the global financial crisis hit last year, the Liberal Democratic party-led government has approved stimulus spending amounting to about four percent of gross domestic product, which could result in a ballooning of the deficit from 3 percent of GDP in 2007 to about 10 percent by 2010.
  • Such gloom may be premature; for the moment investors appear content to fund the deficit for meager returns; yet, the situation clearly cannot be sustained forever.
  • However, addressing a chronic deficit would be politically difficult at the best of times.
  • The added problem for Japan is that budget-balancers will be swimming against an increasingly strong demographic tide.

Furthermore, the implications for tax and spending look calamitous.  Projections suggest that by 2055 the number of people in Japan will fall 30 percent and the resulting tax burden on the dwindling workforce is already being felt.

Data show state social security spending reaching $430 billion in 2015, up 42 percent from 2006. With planned extra spending to address ageing-related challenges such as a shortage of doctors and nurses, the actual bill could be bigger, says the Times.

Source: Mure Dickie, "Japan's fiscal frailty," Financial Times, August 3, 2009.

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