Japan's ageing population is ticking towards disaster

Last year Japan's total population fell by 538,000, bringing the population down to an estimated 124.77 million to start 2023, from a peak of just over 128 million in 2018.

The fertility rate is around 1.37 births per woman, having fallen as low as 1.29 in 2004 and well below the 2.1 needed to maintain a stable population.

The fertility rate in China is 1.28 births per woman and an eye-watering 0.84 in South Korea, with that rate projected to fall further. Australia's fertility rate is 1.58 but the population is growing thanks to immigration, something that Japan and its neighbours in north-east Asia have failed sufficiently to embrace.

That Japan's population is shrinking may be a problem, but the bigger issue is ageing.

The share of the population that are 65 or older was 29.1 per cent in 2021, the largest proportion of any country, and it is expected to rise to one-third by 2036.

There are an estimated 90,526 centenarians in Japan and 15 per cent of the population is over 75.

With Japan leading the world in life expectancy, those numbers will grow.

The ageing of the population also has implications for maintaining living standards.

Like a slow moving train wreck or loudly ticking time bomb, Japan's demographic crisis has long been recognised as a national policy priority.

Japanese Prime Minister Fumio Kishida's remarks to the Diet (Japan's parliament) last week brought urgency to the issue, as he warned that "Japan is standing on the verge of whether we can continue to function as a society".

Mr Kishida declared that it was "now or never" and addressing the demographic crisis "simply cannot wait any longer".

His remarks have captured headlines all over the world highlighting the severity of the task, the importance of the Japanese economy as the third largest in the world, and the recent news that China's population shrank for the first time since 1961.

How Japan manages to navigate its demographic challenge and maintain living standards impacts the global economy but will also serve as a model for other countries.

Its economic success was emulated elsewhere in east Asia and it now serves as a model for demographic transition.

One implication for Australia and the broader region is that Japan's economy will not grow significantly in aggregate size. Japan's strategic weight will not grow, even with the recent announcement of a doubling of defence spending to 2 per cent of GDP within five years.

The primary objective of Japanese economic policy should be to maintain living standards and increase per capita incomes, not necessarily to grow the aggregate economy.

But even growing per capita incomes would be a remarkable achievement in the face of a demographic crunch of a size that no other country has faced before.

Raising the birth rate appears to be Mr Kishida's focus. He announced a doubling of spending on child-related programs and will create a new 'children and families' agency as part of creating the "child-first economy, society" that he says is a must.

Whether Japan's grey democracy will embrace Mr Kishida's vision remains to be seen.

The electorate is dominated by the elderly who do not want to give up their generous medical, aged-care and health benefits to pay for child-centred policies.

Japan's unprecedented government debt of over 270 per cent of GDP - for comparison, Australia's government debt is 59 per cent of GDP - leaves little space for more spending.

Without any political capital - his premiership is on life support with approval ratings below 30 per cent - Kishida has shied away from the one thing that could turn Japan's demographic fortunes around: immigration.

Even with a population opposed to opening to immigration, there were 1.46 million foreign workers in Japan in 2018 with highly skilled foreign professionals allowed to stay for work and international students filling shortages in the service industry. Tokyo and Osaka have large foreign-born populations and are global cities but there are few pathways to naturalisation and it's not easy to move to and stay in Japan.

Former prime minister Shinzo Abe had enough political capital to initiate a major shift in immigration policy with Japan formally opening up to low-skilled or blue-collar workers with a new specific skilled worker visa in 2019 that enabled foreign workers to enter 14 industries suffering from labour shortages, including aged care and agriculture.

The visa program had a cap of 345,000 workers for the first five years and potential pathways for permanent immigration.

By the end of March 2020 there were 3987 foreign workers on the program before the borders closed because of the pandemic.

With a population five times that of Australia, if Japan raised its immigration cap to the equivalent of Australia's 195,000 a year, it would need close to an intake of a million migrants a year, well above the 345,000 over five years that Mr Abe contemplated.

Immigration will need to be part of Japan's demographic solution but to maintain living standards in Japan, each person of working age will need to do more.

The rising-dependency ratio means productivity growth will become even more important.

Productivity-enhancing reforms require breaking through vested interests where they hold back productivity growth and allowing resources to be deployed where they are most productive. There has been progress in areas like corporate governance reform and some opening up of agricultural markets, but serious labour market reform has eluded Japan.

Success there will help attract more immigrants too.

Many more women are participating in the workforce but in precarious work.

Labour market and other reforms would mean Japanese women won't have to choose between a career or having children and that can boost their participation, productivity and the birth rate.