Talk about a grim convergence: Massive national debt, a plunging population, and now, a resurgent pandemic.
In Japan, new infections in recent days have been hitting records, as they climb to the high 2000s. Granted, Japan’s overall caseload is still pretty low relative to the West. It has about 154,000 cases, less than the US state of Texas, which has a population of 29 million, against Japan’s roughly 126 million.
Yet the new wave of infections is spooking investors and politicians as rarely before.
This latest outbreak is a broad one, afflicting four major urban centers – Tokyo, commercial heartland Osaka, Aichi, where Toyota Motor Corp is headquartered, and Sapporo up north in foreign tourism hotshot Hokkaido.
The late 2020 climb in virus numbers is highlighting two uniquely Japanese problems as 2021 beckons: its deflationary economy and its rapidly-aging population. Both are complicated by Tokyo’s political stasis.
What to do?
Yoshihide Suga, in power since September 16, has followed predecessor Shinzo Abe, who spent the first and second coronavirus waves taking his cues from pal Donald Trump. Like the outgoing US president, Abe let local government officials take the lead and he took pains not to panic stock investors.
Thankfully, Japan avoided becoming a cautionary tale not because of the national government’s laid-back approach, but despite it. The Japanese are hygiene maniacs and have long been avid mask-wearers, while Tokyo Governor Yuriko Koike’s often daily Covid-response press briefings helped fill the void for a worried nation.
Now, though, Suga’s prioritization of economic considerations over public health could backfire.
Though Suga’s team recommends bars, restaurants and public forums close early, it’s resisting calls to suspend the “Go To” campaign of national, subsidized travel. That’s because, at a moment when exports and manufacturing are reeling, the program has worked, pumping cash into depressed areas around the nation.
I can vouch for its economic success. On a July trip to Kyoto, a time when Japan’s fabled summer festivals attract millions, the city was a ghost town. It felt like I’d wandered onto the set of an apocalyptic film, not a global tourism mecca.
Last week, I found Kyoto teeming with visitors, despite the surge in coronavirus cases. The Tokyo-Kyoto bullet trains were almost full. In July, I had an entire Shinkansen car to myself.
Suga is reluctant to lose one of the few economic engines now running as his government mulls tossing another US$383 billion of stimulus at Japan’s Covid-19 funk. Japanese news reports predict that the campaign will be extended to next summer.
Prioritizing the economy over infection risk is a specially risky proposition for Japan, given its dismal demographics.
Much public focus in Japan, the developed nation with the biggest debt burden, is on falling pregnancies and marriages amid the pandemic. Yet a more serious pre-existing condition is the ranks of the 65-and-overs that put Japan uniquely at risk as Covid-19 cases jump.
An old problem
Roughly 30% of Japan’s 126 million people are older than 65. That ratio is set to rise well above 35% by 2050. Until now, this has mostly been viewed as a vulnerability in national balance sheet terms.
Tokyo’s debt-to-gross-domestic-product ratio is zooming toward 250%, a trajectory accelerated by the $2.2 trillion the government has spent so far on Covid-19 rescue aid.
Even in the pre-Covid era, Japan’s toxic mix of an aging workforce, falling birthrate, unsustainably indebted government, weak productivity rate and immigration-averse populace repelled foreign investors.
As Singapore-based Jim Rogers, author of The Future of Japan and The World That Will Be Read Through the Flow of Money, put it in November 2017: “Japan has staggering debt. They have a declining population and debt that’s going through the roof. If I were a 10-year-old Japanese … I’d leave.”
Hyperbole aside, the demographic and economic conditions mismatch is colliding with a pandemic that afflicts the elderly disproportionately. This poses short-term risks to economic growth and long-term risks to government finances.
“I reckon the spread of the coronavirus is having many people worried about getting pregnant, giving birth and rearing babies,” admits Tetsushi Sakamoto, the minister in charge of addressing Japan’s declining birthrates.
The nation’s Health Ministry estimated that there will be about 20,000 fewer births this year, putting the closely watched newborns tally at roughly 845,000. Most troubling is the longer-term trend: this marks the fifth straight year of declines, while public borrowing is surging apace.
In 2019, Japan’s fertility rate was a paltry 1.36, far shy of the 1.8. rate the government has been targeting. Even this goal, it’s worth noting, is below the 2.1 children rate needed just to hold population growth constant. Before stepping down in September, Abe called the dwindling birthrate a “national crisis.”
That crisis is now growing before his predecessor’s eyes. This week, Health Minister Norihisa Tamura urged local authorities to shore up regional medical systems by planning for a “worst-case scenario” as the ranks of severely ill Covid-19 patients surges.
Credit rating companies, too. On November 12, Moody’s Investors Service noted Japan’s financial position “has come under greater pressure this year amid the coronavirus pandemic.”
Moody’s analyst Christian de Guzman says “the sharp economic downturn has prompted a sizable fiscal policy response that has elevated Japan’s already high government debt, while the government’s progress on reflation and fiscal consolidation has taken a setback.”
Now, he adds, “downward pressure could emerge if the government is unable to take measures to mitigate the long-term costs related to an aging society, or to refinance its very large stock of debt at affordable rates.”
Those dwindling Japanese
And now, Covid-19 is complicating Japan’s demographic trajectory.
When it comes to the birthrate, Suga is pushing to ramp up spending on fertility treatments, including costly in-vitro fertilization. At the moment, local governments reimburse middle-class couples by up to $10,000. Suga argues Tokyo must be more generous.
But there are fewer young people starting households at all. Japan’s ability to stop its workforce “replacement rate” from collapsing was already dwindling before the latest Covid-19 wave.
Between May and July, the number of delayed marriages jumped 37%. These delays speak to falling economic confidence, which feeds into future spending decisions.
This replacement rate conversation is raging in Tokyo. The National Institute of Population and Social Security Research thinks the current 126 million-strong population will drop to 100 million in 2053 on the way to 88 million in 2065.
Of course, environmentalists worried about carbon levels and depleted resources might welcome a major nation having 38 million fewer people 45 years out.
Japan is, after all, humankind’s demographic laboratory to discern whether economies can thrive despite disappearing workforces. Yet Tokyo is having to make things up as it goes along. And that learning process has taken a very sharp turn in 2020.
One often-cited factoid is Japan’s market for adult diapers is now bigger than the one for baby nappies.
And how can Japan guard the health of its greying masses? On Wednesday, parliament passed a bill allowing for coronavirus vaccinations to be administered free of charge. Great priority needs to be placed on getting the injections to the over-65 set.
Yet there’s also chatter about demanding that the elderly pay higher health costs going forward. Japanese in the 75 or older bracket generally pay about 10% of medical bills out of their pocket. There’s a push in government circles to have them shoulder closer to 20% to relieve pressure on the national social security system.
All this threatens to create a tale-of-two-economies dynamic in a nation that views itself as uniquely egalitarian.
In recent days, for example, Tokyo Governor Koike began advising people over 65 and those with underlying health conditions to refrain from traveling. Koike’s plea was to “closely cooperate to prevent the spread of infections at all costs.”
Yet a generational brawl to come in Japan may soon be a precursor to similar tensions elsewhere.
“Japan’s demographic outlook is very grim,” says economist Daniel Mitchell at the Washington-based Foundation for Economic Education. Of course, Mitchell adds, “the problem of aging populations and misguided entitlements exists in almost every developed nation.”
The difference, of course, is how Japan’s lopsided demographics collides with all that government debt. Both “Hong Kong and Singapore,” Mitchell notes, “have extremely low birthrates and aging populations. But neither jurisdiction faces a fiscal crisis for the simple reason that people largely are responsible for saving for their own retirement.”
It hardly helps, Mitchell adds, that “the demographic situation in Japan is so grim that social scientists have actually estimated the date on which the Japanese people become extinct.”
And now there’s a pandemic adding new urgency to such morbid chatter, one intensifying as you read this.