Aging and the Economy: The Japanese Experience

By Canon, Maria E.; Kudlyak, Marianna et al. | Regional Economist, October 2015 | Go to article overview

Aging and the Economy: The Japanese Experience


Canon, Maria E., Kudlyak, Marianna, Reed, Marisa, Regional Economist


As the population of the world's developed economies grows older, the causal effect of aging on the macroeconomy is bound to land at the top of academic and policy research agendas.

This effect can be seen most clearly through the lens of labor markets. In the U.S., aging features prominently in the debate on causes of the declining labor force participation rate.1 Also, labor market "fluidity," or the flows of jobs and workers across employers, has decreased partly in response to an aging population.2 Similarly, the decline in the business startup rate in the U.S. over the past 30 years has been largely attributed to an aging workforce.3 Some have also questioned whether aging of the population is a cause of the low inflation in the U.S. since the 2007-09 recession.

Since the average age of Japan's population is older than that of most other developed countries, Japan provides a laboratory for studying the causal effects of aging. In Japan, the ratio of the population older than 64 to the population between 15 and 64 has increased since 1990 at a steady pace, while inflation and output have fallen over the same time.4 Because of these demographics, a new wave of research papers has emerged on a potential causal effect of aging on the economy.

In this article, we provide an overview of selected works on the effect of aging on inflation in Japan. We then look into whether the Japanese experience provides an expectation for causality between aging and low inflation in the U.S. by reviewing recent cross-country evidence.

Aging and Deflation: Japan's Experience

A population's average age can be shifted upward by two mechanisms: a decline in fertility (which eventually decreases the number of those potentially entering the labor force) and an increase in longevity (which increases the share of older workers in the population). Japan has experienced a marked decline in fertility since 1950-1955, when the fertility rate was 2.75 births per woman; for the past 40 years, the rate has been below two births per woman. (See Figure 1.) Simultaneously, Japan has experienced increases in longevity (see Figure 2), which have produced not only an older population but an older workforce, relative to other advanced economies, as older workers remain healthy and delay retirement. Since Japan has experienced both types of shifts in recent decades, it has a growing population of older workers, as well as a shrinking population of younger workers due to the decrease in fertility. (See Figure 3.)

Economists Fatih Karahan, Benjamin Pugsley and Aysegul Sahin argued in a recent study that aging of the population, depending on the cause, has contrasting effects on inflation. The authors said that aging is deflationary when caused by an increase in longevity but inflationary when caused by a decline in birth rates. A falling birth rate implies a smaller tax base, which might prompt the government to allow the inflation rate to rise in order to erode its debt and stay solvent. In contrast, increased longevity causes the ranks of pensioners to swell and their political power to increase, leading to tighter monetary policy to prevent inflation from eroding savings. Using a model, the authors concluded that the deflationary effect of higher longevity dominates.

Another study, by economists James Bullard, Carlos Garriga and Christopher Waller, looked at the effect of demographics on the optimal inflation rate. The authors noted that young cohorts, because they have no assets and wages are their main source of income, prefer relatively high inflation. Older workers, instead, work less and depend on the return of their assets; therefore, they prefer low inflation rates. When older cohorts have more influence on redistributive policy, the economy has relatively low inflation.

In a third study, economists Derek Anderson, Dennis Botman and Ben Hunt found that the increased number of pensioners in Japan led to a sell-off of financial assets by retirees, who needed the money to cover expenses. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Note: primary sources have slightly different requirements for citation. Please see these guidelines for more information.

Cited article

Aging and the Economy: The Japanese Experience
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen
Items saved from this article
  • Highlights & Notes
  • Citations
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Search by... Author
    Show... All Results Primary Sources Peer-reviewed

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.