Thirty-year Outlook for a Super-aged Japan (Summary)

◆In our very long-term view of Japan, we anticipate that the growth rate of real GDP will be 1.5% in the 2010s and 2020s, and 1.0% in the 2030s. This will be an economy where man-hour productivity rises 1.7% in the 2010s, 1.8% in the 2020s, and 2.0% in the 2030s. Over the next 30 years or so, nominal wages will on average grow around 2.5%, and the annual inflation rate will rise to around 1.5%. The current account balance as a percentage of GDP is expected to be 1.3% in the 2010s, 0.7% in the 2020s, and -0.2% in the 2030s. As trade deficits become a recurring feature, Japan’s trade structure will shift to one where such deficits are offset by a positive income account balance. For Japan with a considerable and rising population of long-lived people, how well it invests its external assets will be put to the test.

◆In our outlook for the world economy, the presence of China will diminish as its society rapidly ages, but the US will continue to hold center stage. Taking a conservative view of the US economy, we predict that the world economy will grow 3.8% in the 2010s, 3.6% in the 2020s, and 2.6% in the 2030s. Turning to Japan, the M-shaped curve of the labor force participation rate for women should disappear and the participation rate of older people should increase. Given the need for the stable supply of electricity, the diversification of energy sources will be an important consideration. A realistic scenario regarding the mix of electric power sources will be to reduce the use of nuclear power at a pace that is not overly hasty.

◆What will be needed in growth strategies is the strengthening of mutual relationships with foreign economies in trade, investments, and human resources. Equally needed in such strategies is a really good market system where the market mechanism can work to its full potential. The government and the market have a complementary relationship. The issue is not whether the government is large or small but whether it functions well. Japan now has an administration that is firmly focused on growth with the aim of drawing out private-sector initiatives and rebuilding a strong economy. We place great hopes in the further development of policies by this administration. The global economy is improving, even if a step at a time, and positive developments are becoming manifest in the domestic economy. This is precisely the moment for promoting structural reforms that generally tend to be put off to the future.

◆The government’s social security benefit expenditures are predicted to be flat in the 2020s but to grow again in the 2030s. If the current system continues as is, nominal government debt will expand to about Y2,700 trillion, or about 280% of GDP, by end-FY40. Thus, under the present system, government finances will travel a path toward effective bankruptcy, and a watchful eye will need to be constantly directed toward the JGB market. It will be extremely important to steadily raise the consumption tax rate as planned and to build a social security system suitable for a super-aged society within the 2020s at the latest. A further strengthening of the prospects for reforming the social security system and government finances is desired.

◆We performed a simulation of how Japan’s economy would be affected by such developments as the starting age for receiving pension benefits being pushed back, pension benefits being adjusted based on certain demographic factors and macroeconomic conditions, an increase in the proportion of medical expenses being paid out of pocket, and the spread of generic drugs, factoring in how these changes would reciprocally interact with the macroeconomy. In our “structural reform scenario”, we assumed that the implementation of growth strategies would be accompanied by the above policies to reduce pension benefits and by an increase in the consumption tax rate. In this scenario, the growth rate of the economy would decline about 0.2 percentage points compared to our base scenario, but bankruptcy of the social security system and government finances would be avoided. If required reforms are undertaken, it will be possible to achieve economic growth and to maintain the social security system in the coming super-aged society.

◆It is, however, no easy matter to present a scenario where a positive primary balance is attained in structural terms just by reducing benefits and by increasing the taxpayer burden. There is a need to urgently reaffirm that failing to deal properly with the challenges of a super-aged society will risk ruining the lives of citizens. To reduce the ratio of government debt to GDP, benefits paid by the government should be limited further, and the wisdom of the private sector should be unleashed to set the stage for invigorating the private sector economy. The feasibility of individual policies and desirable choices will need to be examined separately. Since the social security of the elderly cannot be supported by the government in its entirety in a super-aged society, a “radical reform scenario” that expands the role of the private sector should be envisioned. It is our responsibility to future generations that we do not allow ambitions for reforms to be stifled.