THE WORLD'S most aged society is facing an unprecedented demographic shift, with important lessons for other developed countries. The share of Japan's population over the age of 70 is expected to surge from 19 per cent in 2015 to 24 per cent by the end of the decade, while its working-age population shrinks and immigration stagnates.
How Japanese corporations respond to these changes will set a milestone for other economies when they face similar social upheaval, according to Sho Kawano of Goldman Sachs Research. He has pinpointed some of the industry responses likely to be most significant for Japan's economy: firstly, a spike in demand for outsourcing and factory automation equipment as the country copes with its labour shortage; secondly, greater call for medical and leisure services, such as homecare and travel, as the elderly population moves into its retirement years.
Other interesting side-effects predicated by the demographic shift include increased consolidation and M&A in Japan's small-business dominated economy, where many business owners have put off retirement because they lacked a successor.
It is not only Japan that is facing this demographic sea change as longevity improves and the birth rate falls. The UK, like much of Western Europe, also has what Goldman Sachs has rather unattractively called a “greying economy”. In EU countries by 2030, there will be around 2.5 people of working age for every pensioner. Contrast this with sub-Saharan Africa, where there will be an estimated 15 for every pensioner.
The UK's state pension already costs the taxpayer £89.3bn a year, out of a total welfare bill of £173.4bn. Therefore it may be tempting for future governments to increase taxes to meet burgeoning pension costs. But history teaches us that high taxation rates ultimately come at the expense of economic growth. Such an approach is self-defeating.
Rather than simply increase state expenditure on an ageing population, the UK would do better to follow Japan's lead, and innovate through automation. Theresa May's industrial strategy, with its focus on technology and AI, is a chance for ministers to illuminate the way forward. So far detail has been scant, but this is an opportunity that should not be missed.
The consequences of kicking the can down the road could be politically unpalatable and economically ruinous.