chapter 4 current problems japan faces today: …hiroshishibuya.com/the japanese economy chapter...

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Chapter 4Current Problems Japan Faces Today:

Slow Growth and Demography

Hiroshi ShibuyaMay 31, 2017

June 4, 2017 Copyright © 2017 Hiroshi Shibuya All Rights Reserved

Current Problems Japan Faces Today :Slow Growth and Demography

• A Popular Hypothesis: Aging Population => Slow Growth

=> Japan’s Lost Decades <--- Is this hypothesis true?

• Public Pension problem and Public Debt (200% of GDP) problem are the direct consequences of slow growth and aging population

• Aging Population (changing demography) is a direct consequence of Japan’s low birthrate (about 1.3-1.5)

• If the popular hypothesis is true, then Japan’s low birthrate is the cause of its aging population, pension problem, public debt problem, slow growth, lost decades, and so on!


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Japan’s Economic Growth Rates(Real GDP Annual Growth Rates)


“Secular Stagnation”


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A Widening Government Budgetary Gap(red = expenditure & blue=revenue)


Historic population of Japan (1920-2010) with projected population (2011-2060)


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Competing Hypotheses for Slow Growth

A Popular Hypothesis: Aging Population (Low Birthrate) => Slow Growth

Other Hypotheses:• “Liquidity Trap” => Slow Growth (cf. early Paul Krugman)• “Deflation” => Slow Growth (cf. Abe government with an inflation target)• “Secular Stagnation” => Slow Growth (cf. Lawrence Summers and later

Paul Krugman?)• “Government Debt” => Slow Growth (Which direction is causality?)• “The 1940 System” => Organization >> Individual

=> Slow Growth (cf. Yukio Noguchi)• “Aversion to Risk-Taking”(Japan’s Education and Culture => A Passive,

Pessimistic, and Negative Mentality or the “Shikatanai” Attitude)=> Little innovation => Slow Growth => Japan’s Lost Decades


Japan’s Changing Population and Demography

•Declining Population of Japanhttps://www.tofugu.com/japan/population-decline/

•Aging Population of Japanhttps://en.wikipedia.org/wiki/Aging_of_Japan

•Changing Demography of Japanhttps://en.wikipedia.org/wiki/Demography_of_Japan

• Japan is not an exception: many (if not all) developed countries (including China) are going to experience an aging population in the coming years

http://www.un.org/esa/population/publications/worldageing19502050/


https://www.tofugu.com/japan/population-decline/

https://en.wikipedia.org/wiki/Aging_of_Japan

https://en.wikipedia.org/wiki/Demography_of_Japan

http://www.un.org/esa/population/publications/worldageing19502050/

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Historic population of Japan (1920-2010) with projected population (2011-2060)


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Comparative Demographical Changes


But, No Correlation between Population and GDP per capita Growth (1975-2005)


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No Correlation between Aging Population and Economic Growth

Daron Acemoglu, Pascual Restrepo (2017), “Secular Stagnation? The Effect of Aging on Economic Growth in the Age of Automation,” NBER Working Paper No. 23077.http://www.nber.org/papers/w23077

Abstract: Several recent theories emphasize the negative effects of an aging population on economic growth, either because of the lower labor force participation and productivity of older workers or because aging will create an excess of savings over desired investment, leading to secular stagnation. We show that there is no such negative relationship in the data. If anything, countries experiencing more rapid aging have grown more in recent decades. We suggest that this counterintuitive finding might reflect the more rapid adoption of automation technologies in countries undergoing more pronounced demographic changes, and provide evidence and theoretical underpinnings for this argument.


Theoretical and Policy Implications

• Population growth has little correlation with GDP per capita growth (see the chart above)

• Population growth and GDP per capita growth are independent variables (cf. the next page for details)

• Japan’s lost decades (slow growth) are not simply the result of its declining population (aging population)!

• Then what is the cause of Japan’s lost decades?


http://www.nber.org/papers/w23077

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The Components of GDP Growth

• GDP = GDP per capita x Population

GDP Growth Rate = GDP per capita Growth Rate

+ Population Growth Rate

• If Japan’s population growth rate is declining, it is all the more important to increase its GDP per capita growth rate!

• How? By increasing productivity (innovation) initiated by creative individuals, which implies the importance of education and socio-cultural environment that can produce creative individuals and achieve their cooperation


What Determines Economic Growth?

• Aging population will reduce the GDP growth rate, but it should not affect the GDP growth per worker because the latter is determined by labor productivity and therefore is independent of demography

• Labor productivity is increased by technological and managerial innovation

• Economic growth is generated by innovation in the post-industrial world (the innovative stage of economic development)

• Innovation is generated by the actions and interactions of creative individuals who are willing to take a risk, willing to take the initiative, willing to project oneself into a better future, and willing to cooperate


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Social Order versus Individual Freedom(Japan’s Socio-Cultural Environment)

• The Japanese society places a higher priority on social order than individual freedom (individuality)

• The Japanese culture tends to encourage a group action and discourage an individual action

• The Japanese culture tends to encourage conformity and discourage individuals from taking a risk or the initiative

• This tendency might have exacerbated after the burst of Japan’s bubble economy in 1990, which created a stagnant social and economic environment, giving rise to a stagnant mentality

• But individual freedom (giving rise to autonomy, competence, and relatedness) is necessary for an intrinsic motivation to emerge towards creativity and innovation


Japan’s Education and Schools• Early Japanese Schools (private):

(1) 塾（Jyuku）since the Heian Period (794-1192) (cf. 学習塾)https://ja.wikipedia.org/wiki/%E5%A1%BE

(2) 寺子屋 (Terakoya) in the Edo Period (1603-1868) https://en.wikipedia.org/wiki/Terakoya

• Since the Meiji Restoration (1868), the government has established a public school system, which uses the extrinsic motivation of “exams, competition, and ranking” (to educate the young to serve the nation?)

• But the authentic goal of education should be to educate the young to develop their potentials so that they can become a true human being --- a person who can learn and grow by intrinsic motivation, set their own goals and work towards realizing them, be capable of critical thinking, be independent yet responsible at the same time, care for and cooperate with others, and contribute to humanity.


https://ja.wikipedia.org/wiki/%E5%A1%BE

https://en.wikipedia.org/wiki/Terakoya

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The Importance of Intrinsic Motivation: Autonomy, Competence, and Relatedness

• Deci’s Proposition 1: Intrinsic motivation is at the heart of creativity,innovation, responsibility, healthy behavior, and lasting change

• Deci’s Proposition 2: A combination of autonomy, competence, and relatedness will generate people’s intrinsic motivation (vitality)

• Deci’s Proposition 3: Extrinsic motivation (such as money, competition, ranking, threat, surveillance, and evaluations) will undermine people’s intrinsic motivation

• Therefore, the authentic goal of education (indeed, a company and our society) should be to foster a social environment that encourages autonomy, competence, and relatedness in and among the people, giving rise to their intrinsic motivation

• Edward L. Deci (with Richard Flaste), Why We Do What We Do: Understanding Self-Motivation, Penguin Books, 1995.


Homo Sapiens, Cooperation, and Civilization• Harari’s Proposition 1: Homo sapiens have ruled the world because

they alone can cooperate flexibly in large numbers

• How? They can imagine things and produce their common illusions (fictions, myths, social constructs, and imagined realities) that did not really exist in the natural world such as religion, gods, laws, money, and nations, under which they can form an integrated group and cooperate within the group (to compete against other groups?)

• Harari’s Proposition 2: A dramatic increase in the collective power and ostensible success of Homo sapiens went hand in hand with much individual suffering

• Yuval Noah Harari, Sapiens: A Brief History of Humankind, HarperCollins, 2015.

• Yuval Noah Harari, Homo Deus: A Brief History of Tomorrow, HarperCollins, 2017.


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Why Has the Birthrate Declined?Status Competition, Inequality, and Fertility

• A Theory of Over-Investment in Social Standing

“An increased investment in both human capital (education) and social status (success) generate substantial decreases in fertility, particularly under conditions of high inequality and intense status competition.”

https://www.weforum.org/agenda/2016/04/could-this-explain-why-were-having-fewer-children/

http://rstb.royalsocietypublishing.org/content/371/1692/20150150


Biological Fitness (Fertility) versus Social Fitness (Status)

• Humans (Homo sapiens) are social animals and have created an increasingly large, complex and competitive society in which they spend the most of their life time

• Modern men and women live more and more in socialenvironment and less and less in natural environment

• A Hypothesis of Over-Investment on Social Status: For modern men and women, social environment dominates natural environment. Consequently the social fitness (status) has become a more important goal than the biological fitness (fertility). This explains why the human birthrate has fallen in all modern societies.


https://www.weforum.org/agenda/2016/04/could-this-explain-why-were-having-fewer-children/

http://rstb.royalsocietypublishing.org/content/371/1692/20150150

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Rising Percentages of Unmarried Men and Women



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chapter 4 current problems japan faces today: …hiroshishibuya.com/the japanese economy chapter...

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