Online Extra: How a Gray Japan Can Thrive

Merrill Lynch's Jesper Koll says by not applying shock therapy, the Koizumi government is taking the right approach

Fears over the impact of an aging population are nothing new in Japan. Today, though, with the country's working population shrinking and pension costs spiraling, concern is reaching fever pitch.

However, not everyone is downbeat about the implications of a graying society. Jesper Koll, chief Japan analyst at Merrill Lynch & Co. -- and a long-time Japan optimist -- recently talked with BusinessWeek Correspondent Ian Rowley in Tokyo. Edited excerpts of their conversation follow:

Q: What's your view on Japan's demographic time bomb?


For one reason or another, Japan's postwar baby boom started earlier than in Europe or the U.S., which means aging is one area where Japan is definitely ahead of the rest of the world by a decade or 15 years.

Some of the statistics are startling. If you extrapolate population statistics with a straight line for births and deaths, there will only be 480 Japanese left in 600 years. A little bit nearer to the present day, between now and 2012, 8.5% of the labor force will retire.

Q: What are the implications for the economy?


Well, economic growth basically comes from the growth of the labor force and by improving productivity. During the 1980s, the labor force grew at around 1% per year, while productivity growth was between 2.25% and 2.5%. Added together, the capacity for noninflationary growth was 3.25% to 3.5%.

By contrast, over the next 10 years, the labor force will be declining by about 0.5% per year. If productivity is constant, you end up with growth potential of 1.75% to 2%.

Q: Does it matter?


It all depends on what you want to achieve. If you look at the supply capacity and the potential of the Japanese economy to grow, you will have a natural reduction in the growth rate. So if the objective is economic growth, then it's unequivocally negative.

However, it could actually be a good thing for the profitability of corporations. For companies that have excessive employment costs, the fact that your wage bill will fall by about 0.5% per year is obviously a good thing for profit margins.

Q: But surely the pension system is a source for concern?


Pension contributions [by individuals] will be increasing steadily. The fact of the matter is that today, you've got 4.7 working Japanese supporting one pension. By 2015, you're going to have 2.7 workers supporting each pension.

Q: Is the Koizumi government right to increase pension premiums every year between now and 2017?


I don't want to sound blasé about the whole thing, but I think the answer is yes. They're going about it the right way -- because they're not using shock therapy.

In 1998, we had an ugly reminder of what shock therapy does in Japan when Prime Minister Ryutaro Hashimoto increased pension contributions, social-security contributions, and consumption tax, effectively cutting disposable income by about 2.5%. That was a recipe for recession.

What they're doing now is increasing peoples' burden by 0.3% to 0.4% per year between now and 2017. It's a marathon rather than a sprint -- and the Japanese are very good at marathons.

Q: Could the Japanese government increase immigration rather than tax rates?


They could, but to all intents and purposes, there will not be a blanket immigration policy. In any case, it's possible to do all manner of actuarial analysis to show how immigration increases and female participation in the labor force could offset the declining working population.

But at the end of the day, part of the solution has to be a decrease in the pension and an increase in contributions. The willingness of the Japanese population to accept financial hardship shouldn't be underestimated.

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