Japan’s population problem is no secret. Population growth importance lies within firm investment, housing markets, and overall gross domestic product. Japan has seen the fertility rate of 1.30 births per woman falling further to 1.26 births per woman in 2022 while common fertility rates that meet the replacement hover around 2.0 - 2.1 births per woman. With Japan having one of the highest life expectancy in the world at 84.45 years of age in 2021, the concern is that younger generations will have to be the load bearers for upholding the economy. This all combined has seen a 3 million population decrease since the 2010’s gives a multitude of problems for the Japanese economy. Missing production from this labor is bound to send shockwaves through the economy as the population graph (Chart 1) is very top heavy, putting pressure on pensions and workforces to pick up the slack on the missing replacement in labor.

Immigration has been where many Western countries have found solace. However, Japan has a unique approach to immigration when compared to its Western counterparts. Japan has a cautious and controlled immigration policy which has Japan fairly resistant to the idea of mass immigration. This has resulted in a 33% increase in immigration since 2010. This strategy had only slightly alleviated the pressures on Japan leaving the nation to deal with the shrinking labor force and aging population. During the pandemic, Japan had seen a drop in net migration of 96,369 indicative of the change in policy which has not recovered since.

The declining population in Japan poses an abundance of economic risks to Japan. The smaller workforce means fewer taxpayers, less aggregate consumption and shocks to current supply chains. This leads to lower economic activity, lower tax revenue for governments and less social programs the government can put tax revenue towards. Social programs are needed to be made to support this aging population with accessibility and healthcare concerns. The Japanese government is in a hard place where decisions on immigration policy, government expenditure and pension benefits are going to have to be revamped.

A declining population also serves as a big risk to the Bank of Japan. The declining population means fewer people demanding goods and services, potentially leading to lower domestic wages and prices. This deflationary pressure on prices and wages can lead to a more uncertain future, having more risk premiums priced into the Japanese economy.

The implications of a declining population for the housing market are clear. Less people demanding housing exerts downward pressure on house prices. A more mature labor force had led to migration to urban areas in the pursuit of higher wages. The result of this is a surplus of vacant homes in rural areas. This phenomenon has become so prevalent where the term “akiya” has been born to describe these abandoned rural houses.

Government expenditures will need to increase to support an aging population. Japan will have to get a program in place to address these abandoned houses. The oversupply of houses is driving prices down, and creating negative external costs associated with maintaining or destroying these houses. The declining birth rate is also reflective of broader social and cultural shifts in Japan. Young people are increasingly prioritizing education and career over starting families. The high cost of living, particularly in urban areas, coupled with the demanding work culture, makes raising children a daunting prospect for many.

Traditional gender roles and expectations continue to play a significant role in family planning decisions. Women, who are often expected to bear the brunt of child-bearing responsibilities, face significant career setbacks if they choose to have children. Despite government efforts to promote work-life balance and encourage higher birth rates, societal norms have been slow to change.

Addressing Japan’s birth dearth requires an in-depth multi pronged solution. Not one instant solution will fix the replacement problem but introducing more comprehensive family support policies, affordable childcare, parental leave leave and financial incentives are possible solutions being discussed. Fostering a more equitable childcare system where parents feel like attending to children and career are options that aren’t opposed to each other. Japan has a balancing issue with immigration policy. While they have a relatively negative view on immigration, it is important to have the in-demand sectors of their economy bolstered by immigration. If the tool of immigration can be used responsibly, Japan may be able to get out of the issue of their birth dearth.

Japan's population decline presents significant challenges, but it also offers an opportunity for the country to rethink and reshape its economic and social policies. By addressing the root causes and implementing forward-thinking solutions, Japan can navigate this demographic transition and ensure a prosperous future for its citizens.

Japan's Birth Dearth: Declining Population Threatens Housing Markets and Economic Growth

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