Is Japan’s Demographic Dilemma The #1 Challenge For Economic Recovery?

Via.

Although not in the spotlight as much as the U.S. economic recession or the European currency crisis, Japan’s economy is experiencing its own set of challenges. The recent shutdown of all nuclear reactors, a public safety measure enacted in response to the Fukushima nuclear incident, has led to an increase in fossil fuel imports. This, coupled with an appreciating yen, has led to a trade deficit further pressuring an economy experiencing deflation and a growing fiscal deficit. Recently, the Bank of Japan (BOJ) enacted a new round of “monetary easing” to the tune of ¥15 trillion in the hopes of attaining an inflation rate of 1% and boosting moribund domestic spending. Despite these aggressive steps, many wonder if the BOJ is doing enough to kick start the economy and foreign investors remain largely unconvinced.

Professor Koichi Hamada addresses these concerns in his talk Monetary Policy & Japan’s Economic Recovery, Wednesday, June 13 at Japan Society. Professor Hamada is the Tuntex Professor of Economics at Yale University and Professor Emeritus at the University of Tokyo. According to a recent Wall Street Journal article, he is the former teacher of BOJ Governor Masaaki Shirakawa and a proponent of monetary easing. The talk will be moderated by Paul Sheard, Standard and Poor’s chief global economist.

While Hamada will focus primarily on monetary policy, another major area for Japan to tackle is its demographic dilemma. The median age of the country is around 45 and continually rising due to declining birth rates and a restrictive immigration policy. Spending on social security benefits accounts for a large chunk of the government debt, the value of which increases as the yen depreciates. As Paul Krugman pointed out in his classic 1998 article “Japan: What Went Wrong?,” BOJ monetary policy is relatively ineffectual in the face of aging population—a problem unique to Japan and not apparent in the U.S. or European crises. Perhaps it should be a primary focus for recovery. As Shirakawa stated in May, "The current difficulties come not from the continued population aging itself, but from the delayed response to it."

--Lyle Sylvander

Updated 6/12/12.