Transcript Demographics - Federal Reserve Bank of Atlanta

THE IMPACTS OF DEMOGRAPHIC
CHANGE: JAPAN’S EXPERIENCE
AND IMPLICATIONS FOR THE US
Masaaki Shirakawa
Aoyama-Gakuin University
March ７, 2016
Luncheon talk at the event hosted by Federal Reserve
Bank of Atlanta and The Japan-America Society of Georgia
(“US-Japan Now--Economic Impacts of Ageing” )
2
PART 1
Why am I talking about demographics?
3
Quiz
Which advanced economy has recorded the
highest growth of GDP per working-age population
--people aged 15 and 64--in the past 5 years, 10
years and 15 years?
4
The answer is Japan, though it may sound
counter-intuitive
GDP per working-age population
125
GDP
2000=100
130
120
125
115
120
110
115
2000=100
110
105
105
100
95
90
U.S.
U.K.
Japan
Euro area
Germany
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
100
95
U.S.
U.K.
Japan
Euro area
Germany
90
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
CY
5
Implications
• A decade is long enough for us to neglect the impact of
rapid ageing
• Japanese economy is not so bad as is implied by
expressions frequently used in media and policy circle--”lost
decade(s)”, deflation plagued country, etc.
• But a sober fact is that people who can actually work is now
shrinking in both absolute number and relative terms. What
is important as a society is not GDP per working-age
population but GDP per capita
• Fundamental challenge facing Japanese economy is
demographic change:
• Rapid ageing
• Declining population
6
Working-age population in Japan is now
decreasing by one million every year
(% chg.)
(Difference, 1,000 people)
1.0
2,500
2,000
0.5
1,500
Population
Working Age
0.0
1,000
500
-0.5
Population
0
Working Age
-1.0
-500
-1.5
1990
1995
2000
2005
2010
-1,000
1990
1995
2000
2005
2010
7
Demographics：Japan and the US
Growth of working-age
population
ave., y/y % chg.
Japan
U.S.
Share of working-age
population
%
2.5
2.0
Share of population
Aged over 65
%
75
Japan
Japan
U.S.
U.S.
25
70
1.5
20
1.0
15
65
0.5
0.0
10
60
-0.5
5
-1.0
0
55
-1.5
1955 60 65 70 75 80 85 90 95 00 05 10 15
30
1955 60 65 70 75 80 85 90 95 00 05 10 15
Note: Working-age population means the aged between 15 and 64 years.
Source: United Nations.
1955 60 65 70 75 80 85 90 95 00 05 10 15
8
Motivation of my talk today
• Explaining about the importance of demographics by using
•
•
•
•
Japan’ s experience as a quintessential example
This is important for the rest of the world as well:
The US is no exception, being faced with demographic
challenges though less severe
Challenges are acute for emerging Asia, especially for China
in decade to come.⇒SLIDE 9
Unfortunately, wrong lessons are often drawn from Japanese
experiences, which I am afraid might misguide macro economic
policies in other countries
A case in point is debate on deflation which is grossly
exaggerated⇒SLIDE 10,11
I ,too, had to confess I was ignorant about the importance of
demographics 30 years ago and quite dismissive of the
argument by “alarmist”
My main message is to be prepared!
9
Japan is a forerunner. Other Asian
countries including China are following suit
10
Yes, Japan experienced mild deflation but
that is not the root cause of the problem
CPI inflation rate in Japan
105
CY2010 = 100
y/y % chg.
2%
100
4
2
1%
95
0
CPI (excluding fresh food)
90
-2
Change (rhs)
Change (further excluding the direct effects of consumption tax; rhs)
Level (lhs)
85
1985
-4
1990
1995
2000
2005
2010
2015
11
Japan’s GDP growth rate and contribution of
components: boosting potential growth is a key
GDP
Consumption
Residential investment
Business investment
Private inventory
Government expenditure
Net export
(Export)
(Import)
2012 4Q/ 2009 2015 4Q/ 2012
4Q
4Q
1.9
3.9
-1.0
2.4
-0.1
0.4
1.2
1.0
0.4
-1.4
0.9
(-2.2)
0.8
0.3
1.0
0.7
(2.6)
(-1.9)
12
PART 2
How demographics--rapid ageing and
lower fertility rate-- affects the Japanese
economy?
13
Demographics affects the society and the
economy in various manners
• Today, I will focus mainly on the first.
1. Growth and Inflation
2. Real estate prices and financial system
3. Differing impact on regional economy
4. Balance of payments
5. Social security and government finance
14
Japan’s long-run demographic projection
is very dire
thousands
thousands
100,000
140,000
Forecast by IPSS
90,000
130,000
80,000
120,000
70,000
110,000
60,000
100,000
Total population (right scale)
50,000
90,000
Working-age population (left scale)
40,000
80,000
1980 85
90
95
00
05
10
15
20
25
30
35
40
45
50
55
60
Note: Working-age population means the aged between 15 and 64 years.
Sources: Ministry of Internal Affairs and Communications; National Institute of Population and Social Security Research.
15
The net impact of ageing on growth is likely
negative, though its mechanism is complex
Negative
1. Shrinking domestic market (demand side) and declining
labor force (supply side) ⇒SLIDE 16
2. The impact of ageing on political process (“Silver
democracy”) ⇒SLIDE 17
3. Relative decline in innovators who are generally young
⇒SLIDE 18
Positive
4. Technological innovation induced by demographic
change
Long-run factors
5. Fertility rate
6. Immigration
16
Projection of Japan’s potential growth in
decades to come: demographic headwind
17
“Silver democracy”: delay in social security/ fiscal
reform and inclination toward short-sighted, less
growth friendly policy
Does democracy work well in shrinking economy?
years old
50
45
40
35
1950
22.3 yo
1980
32.5 yo
30
2013
46.0 yo
25
20
1950
55
60
65
70
75
80
85
90
95
00
05
10
11
12
13
18
The Age Distribution of Great Innovation
Benjamin F. Jones, “Age and Great Invention” (Working Paper 11359, National Bureau of
Economic Research, May 2005)
19
The process and mechanism that ageing affects
growth and inflation change over time
• First stage: Anticipation of ageing
An expected decline in future demand depresses current
expenditure⇒SLIDE 20
• Second stage: Transition toward a new steady state
with fewer population
Actual decline in productive capacity due to decrease in
working-age population dominates
Subsequent decline in “effective” working-age population
∵Very aged people needs growing number of caring and
nursing people ⇒SLIDE 21,22
• Third stage: New steady state with fewer population?
20
Domestic spending: change in composition
and gradual contraction
21
Increased demand for medicare and
nursing care service “absorbs” labor
thousand
% of population
35,000
30
Population aged over 65
30,000
Medicare insured
25,000
Population aged over 65
25
Medicare insured
Nursing care certified
Nursing care certified
20
20,000
15
15,000
10
10,000
5,000
5
0
0
1983
1987
1991
1995
1999
2003
2007
2011
1983
1987
1991
1995
1999
2003
2007
Note: Eligibility for Medicare insurance (senior-stage) was changed from “over 70 years
old” to “over 75 years old”. That change was phased in from 2002 to 2007. Nursing care
insurance started from 2000.
2011
22
“Effective” working-age population decreases
more than actual working-age population
The current ratio of population aged over 65 to people engaged in medical
and welfare services is assumed constant, although it is likely to increase.
million
times
11
90
10
85
9
80
8
projection
75
Population aged over 65/doctors and care-takers
7
6
Population aged over 65/employees in medical
and welfare services
70
Working-age population
65
less doctors and care-takers
5
60
less employees in medical and welfare
services
4
55
1990
3
2000
2005
2010
1995
2000
2005
2010
2015
2020
2025
2030
23
Demographics also affect time profile of inflation
rate, even though it is not a dominant determinant
We come to observe positive correlation between inflation rate and
growth rate of working-age population among OECD countries in
the recent decade. Is this just a spurious correlation?
24
The time profile and mechanism that ageing
affects inflation rate
• First stage: deflationary pressure (other thing being equal)
Expectation of a decline in future demand precedes
actual decline in productive capacity
• Second stage: inflationary pressure (other thing being
equal)
Actual decline in productive capacity due to decrease in
workforce create inflationary pressure.⇒SLIDE 25
• Third stage: neutral as long as fiscal sustainability is
maintained. However, if this condition is not met, either high
inflation or financial system instability is a consequence
25
Labor market in Japan is now tightening
amid rapid decline in working-age population
s.a., %
6
5
4
3
Unemployment rate
Structural unemployment rate
2
01
02
03
04
05
06
07
08
09
Change in unemployment rate (% points)
Change in labor participation rate (% points)
Change in working-age population (thousands)
Change in employed person (thousands)
Aged people (thousands)
Female (thousands)
10
11
12
13
14
15
Year 2005-2010
+0.7
-0.8
-2,687
-580
+750
+230
Year 2010-2015
-1.7
0.0
-4,917
+780
+1,600
+980
Note: The structural unemployment rate is estimated by the Japan Institute for Labour Policy and Training.
Sources: Ministry of Internal Affairs and Communications; National Institute of Population and Social Security Research.
26
PART 3
Possible lessons for other countries
27
#1 Don’t be dismissive of the impacts of
demographics: “Demographics matters a lot”
People tend to underestimate the importance of demographic
change
Several observations
• It is a very slow-moving picture. Population continued to increase
long after fertility rate decline below replacement level because of
longer longevity.
• The peak of “population bonus” (late 1980s) coincided with the
bubble which masked underlying problem
• Once society goes beyond a critical point of ageing, it is hard to
forge a politically feasible consensus because of conflicting
interests between generations
• People just do not want to hear gloomy story. Instead, easy
explanation for Japan’s low growth—deflation-- is offered, though
this is not the root cause of the problem facing Japan
28
Academic economists were generally
optimistic. Issues are so intractable
• Analysis called for is so disparate that economists and
policymakers alike tend to inadvertently downplay the
importance demographics, despite the fact that long-run
is cumulative “short-run”
• Yes, economists incorporate “young” and “old” in
overlapping generation model. But still their focus is on
“steady state”
• Real challenge for society and, for that matter,
policymakers and economists is the transition from one
“steady state” to another
29
#2: Don’t draw wrong lessons from
Japanese experience
• Deflation, albeit mild, was often identified as the cause of
the low growth of Japan, which led to monetary policy
activism globally
• But the fundamental problem is not deflation but
demographics
Aggressive monetary policy is not making much
difference so far⇒SLIDE 11, 30
30
Low growth in post-bubble period: Japan in
1990s and US and Europe since 2007
1991=100
86
88
90
92
94
96
98
00
86
88
90
92
94
96
98
06
08
88
90
92
94
96
98
00
115
115
110
110
110
105
105
105
100
100
100
95
95
95
US (lower scale)
90
Euro area (lower scale)
90
UK (lower scale)
90
Japan (upper scale)
85
Japan (upper scale)
85
Japan (upper scale)
85
10
12
14
2007=100
80
80
75
04
86
00
115
80
02
1991=100
1991=100
75
75
02
04
06
08
10
12
14
2007=100
02
04
06
08
10
12
14
2007=100
31
#3: We do not have one-size-fits-all solution
for demographic change
• The manner in which demographics affects the economy
and needed policy response vary
• Each society has different dynamics of politics, economy
and culture.
Labor market practice
The role of family
Immigration
History as an important factor shaping society’s
response
Economic and demographic conditions of neighboring
countries
32
PART 4
The US economy: A view from Japan’s
experience of demographics
33
In the US, direct impact of demographics on
growth is projected to be less severe
• Qualitatively, both Japan and the US are the same ⇒SLIDE 7
• Mitigating factors:
The US has still higher fertility rate, compared with Japan
The US accepts far more immigration
Diversity due to receiving immigration is functioning like a
“magnet” of attracting young entrepreneur
On top of that, the US could learn right lessons form the
“aged countries” like Japan and take decisions before
adverse political/social dynamics kicks in
• Important caveat
Growth of working-age population of sending emigrants to
the US is also declining⇒SLIDE 34
34
Annual growth of working-age population
of countries sending emigrants to the US
Top 10 countries in terms of US
immigrant
Mexico
3.0
4.0
3.5
2.5
3.0
2.0
2.5
1.5
2.0
1.0
1.5
0.5
1.0
0.0
0.5
0.0
1970 75
80
85
90
95 2000 05
10
15
20
25
30
35
40
Source: Ryutaro Kono (BNP Pariba)
-0.5
1970 75
80
85
90
95 2000 05
10
15
20
25
30
35
40
35
Viewed from the US, demographic impact on
global economy and its subtle effect on
monetary policy responses are more important
• Secular stagnation?
• Monetary policy activism on a global scale
• Its possible impact on global financial system
36
Thank you for your attention.
37
ANNEX:
Some issues that I hope economists will
tackle
38
#１ In terms of population growth, is “negative”
just a number below zero or special?
• My observation is that negative is “special”. Fundamental
reason is social, political and economic dynamics
resulting from negative population growth tends to make
achieving stationary population growth difficult.
• Counter-argument is possible. So far, we focused mainly
on advanced economies and emerging economies. But
after all, world population is growing rapidly, especially in
African countries. If we look at issues from truly global
perspective, how does my observation change?
39
＃２ After all what determines long-run
trend of fertility rate?
Report to the Social Security Advisory Board (September 2011)