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Japan’s Geriatric Future
How will a shrinking economic power handle a rapidly aging population?


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In the 2009 Pew Global Attitudes Survey, conducted last spring, only 18 percent of Japanese said they expected economic conditions in their country to improve over the next year. Remarkably, that represented a 13-percentage-point increase from 2008, when just 5 percent of Japanese said they expected improvement. The corresponding 2009 figures in China, India, and the United States were 82 percent, 75 percent, and 59 percent, respectively. Fewer than one-fifth (19 percent) of Japanese told the 2009 Pew interviewers that children in their country would grow up to be “better off” than people are today, compared with 89 percent of Chinese, 78 percent of Indians, and 36 percent of Americans.

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Japan’s economic pessimism is part of a deeper societal malaise. The Asian giant never fully recovered from its early-1990s asset-price collapse and subsequent “lost decade” of stagnation (which actually lasted more than a decade). Within a short period, Japan went from being hyped as an emerging superpower to being dismissed as a sclerotic basket case. In 1992, Japan’s per capita income ranked fifth among OECD countries; in 2002, it ranked 19th. Under Prime Minister Junichiro Koizumi, a conservative who held office from 2001 to 2006, Tokyo belatedly forced Japanese financial institutions to tackle their nonperforming loans. This ended a protracted banking crisis and bolstered the economy. Thanks to Koizumi’s achievements and a post-2002 export surge, Japan enjoyed its longest unbroken expansion since the conclusion of World War II.

Then came the Great Recession, which took a massive toll on all export-oriented economies and proved disastrous for
Japan. The country plunged into its worst downturn of the modern era. Though it returned to growth in mid-2009, the durability of that growth is uncertain. Japan’s wobbly recovery has been propelled by a host of government stimulus measures and an improving export picture. In its new World Economic Outlook, released earlier this month, the International Monetary Fund predicts that Japan’s real GDP will expand by 1.9 percent in 2010, after shrinking by 5.2 percent last year. On April 14, Bank of Japan governor Masaaki Shirakawa said that “concerns about a so-called double-dip recession have been greatly receding.”

Yet the country is still grappling with deflation, and Finance Minister Naoto
Kan has cautioned that “we need to see corporate and consumer spending rise to say this recovery is self-sustaining.” Perhaps most ominously, Japan’s gross public debt will soon be double its GDP (if it isn’t already), the highest such ratio in the OECD. Granted, nearly all of that debt is held domestically, but it remains a grave threat to future prosperity. In January, Standard & Poor’s slashed its outlook for Japan’s sovereign-debt rating from “stable” to “negative.” Last week, Fitch Ratings warned that absent a “sustained economic recovery and fiscal consolidation, government debt will continue to rise, placing downward pressure on sovereign credit and ratings over the medium term.”

Steering
Japan through these choppy waters is Prime Minister Yukio Hatoyama, who took office in mid-September after a historic election that saw the Liberal Democratic Party (LDP) lose power for only the second time since the creation of Japan’s modern political system in 1955. A member of the Democratic Party of Japan (DPJ), which was established just twelve years ago, Hatoyama began his premiership with great fanfare. However, his popularity has fallen sharply since then, amid campaign-finance scandals, persistent economic pain, and turbulence in the U.S.-Japan alliance.


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