Japan’s economy is not underperforming – its population is getting too old

Japan is officially back into recession as its economy shrank for the second consecutive period in the third quarter this year.

Japan’s economy – along with Italy- performs poorly in comparison with other G7 countries. In 2020 both economies are forecast to be just 20 per cent larger than they were in the in the 1990s, compared to the doubling of GDP in the US and Canada.

Japan is set to have the weakest performance in 2015 among all G7 countries, and the October IMF forecasts are probably optimistic.

But if we look at GDP per person of working age (15-64 years old) the story is quite different.

Japan’s economic growth is among the strongest this year and its long term performance is in line with that of all the other G7 countries except Italy.

This is because Japanese population is shrinking and aging fast. There are now 7.7 million fewer people of working age than there were 10 years ago and about 15 per cent fewer than in the early 1990s. No other country in the world has experienced such a shrinkage in the working-age population.

More than one in four people in Japan are aged 65 or above, the highest proportion in the world and nearly double the comparable figure in the US of just 14 per cent. And the proportion is rising rapidly – it was about 20 per cent as recently as 2006.

Germany and Italy also have very large proportions of their population aged 65 and over, about 21 per cent of their population, but the ageing trend is not as fast as it is in Japan and is likely to have a smaller impact on total economic output.

Not surprisingly Japanese labour force participation rates among the population aged above 15 is just 59 per cent, below the OECD average.

With such an adverse underlying demographic situation the headline GDP growth measure seems unrepresentative of Japanese economic performance.

Those that are in working age, are performing quite well.