Japan – The future of Europe?

As of 2014, the Japanese economy is the third largest in the world, with only China and America surpassing it. However, the Japanese economy, when measured by its gross domestic product (GDP), has barely grown in the past twenty years. This economic stagnation is well documented, and continues to this day, despite the Japanese government’s massive efforts at economic stimulus. Japan has been run at a fiscal deficit since 1991, and because of this it has one of highest levels of national debt in the world. In fact, Japan’s debt to GDP ratio is higher than both Greece and Zimbabwe, which themselves are hardly models of economic success.

There are many reasons for this stagnation, and whilst economists may bicker over the details, there are several harsh realities which Japan cannot escape. Two of these realities are key to the stagnation. The first one is a lack of natural resources. Japan imports nearly all of its energy due to having little to no oil or gas reserves, and it also has to import much of its food supply. Overall this means an over-reliance on foreign markets to supports its economic growth and stability.

The second reality is perhaps the more important of the two: demographics. Low birth rates and low levels of immigration mean that Japan has a rapidly declining population. In 2013, the population fell by 244,000, and this trend looks set to continue for the foreseeable future. The most recent official prediction released by the National Institute of Population and Social Security Research stated that the population of Japan in 2055 will be around 90 million, with over 40% of the population being older than 65. If accurate, this would be a decrease of nearly 1 million people per year for the next 35 years.

What does this have to do with the economy? The simple answer is: a lot. Japan’s declining population means that the elderly are becoming a larger percentage of the population, whilst young people are becoming a smaller percentage. Elderly people must be supported by the state when they retire. Younger people work, consume goods, and pay taxes which support this state welfare system. This shift in the population means that Japan already struggles to fund its welfare sector – and this will only become more difficult as the population declines. It also means that the market for many consumer goods aimed towards the younger generations will shrink. Less people buying things means less GDP. Despite the efforts of the Japanese government at stimulating the economy, it is difficult to imagine a future where Japan has a real, long-term surge in economic development. This stagnation that has been taking place since the early 90s is perhaps now the new normal.

Japan may be the other side of the world, but many of these problems are also problems which European nations face. In terms of demographics, Germany, Italy and Austria all have birthrates comparable to Japan’s, and the rest of Europe is not far behind. Without the immigration that much of Western Europe has experienced over the past two or three decades, it is likely that several EU countries would already be experiencing population decline. In Eastern Europe, particularly in the immediate aftermath of the dissolution of the Soviet Union, birthrates plummeted and many of the former eastern bloc nations are now going through population decline. For instance, between 1990 and 2012 the population of Ukraine fell by 12 percent, or 6.2 million people.

Whilst many Eastern European countries experienced a decline in population due to a breakdown in the stability of the old socio-economic order, the fact remains that in countries that are developed and industrialised, people have less children. This leads to some of the problems which Japan is facing now, and will face in the future.

Is Japan today a vision of Europe in the future? I would tentatively say yes. Western Europe is a densely populated, highly developed and industrialised region of the world. It is also a region with little to offer in terms natural resources. Britain is fortunate to have access to North Sea oil and gas, but those reserves are small in comparison the major energy producers of the world, and production has been in decline since the late 1990s. There is little room for development in terms of infrastructure or the extraction of natural resources, and the population of the European Union looks set to either remain the same, or decline over the next 30 to 40 years. In this broad sense, Western Europe is in a similar situation to Japan.

The European Commission calls the future ageing of Europe ‘one of the greatest social and economic challenges of the 21st century for European societies.’ With this in mind, I would suggest that European leaders, present and future, who look exclusively at their nation’s GDP as the indicator of economic success are setting themselves up for disappointment, as the days of long term economic growth could well be over. What is perhaps more important than the growth of GDP is preparing for this inevitable future, and preparing the state for an increasingly large elderly population, who must be supported by an increasingly small younger population. Funding state welfare programmes will be a real challenge for Europe when faced with a declining number of tax payers. It will also be important to ensure that the high standard of living many EU countries currently enjoy does not disappear when faced with a long period of economic stagnation. It will be crucial to look towards Japan, in order to see what measures they take to manage this issue, and whether or not they succeed. The lessons to be learned there are crucial.