Sunday, June 3, 2012

The influence of demographic change and the measure from Japanese case

Hirokazu Kitahara

In “What happens next?” authors suggest five challenges - the great rebalancing, the productivity imperative, the global grid, pricing the planet, the market state - of innovation in businesses for the next decade. Regarding the second challenge, low birth rates and graying workforces in developed countries are estimated to limit the economic growth. Especially, the hurdle is the highest for Japan, and “each worker will have to increase output by 160 yen to generate an additional 100 yen of growth.”

However, we cannot make the most of the recognition without exploring the actual data. As described in “Going from global trends to corporate strategy,” “a scan of global trends too often proves superficial or simplifies the complexity of interacting subtrends, thus putting strategies and operations at risk.” We need to approach the challenge caused by dwindling birthrate and an aging population with more broad options. I will show the reasons based on the speech by Masaaki Shirakawa, Governor of the Bank of Japan on May 30, 2012. *

The biggest challenge for Japanese economy is the lasting low growth rates. In 2000s, the growth of productivity was 0.8 percent on average, but the decreasing working people lessened the growth rate by 0.3 percent point, and what is worse, the decrease of labor power is estimated to drag on the economy all the more: -0.6 percent point in 2010s, -0.8 percent point in 2020s, -1.2 percent point in 2030s. In the speech, Governor Shirakawa suggests three remedies: the increase of labor force, the adjustment of supply-side structure with the demand pattern and the response of growing demand overseas, too. The point is he suggests options without relying on the productivity improvement through the self-help efforts of the individual company.

In the end, does Japan need to complement the negative impact by increasing the productivity? Yes, but there is much room for policy makers to play a role. It’s not a good idea to focus on narrow-defined productivity. And, this thought will be applicable for other developed countries, too.

*Masaaki Shirakawa, Governor of the Bank of Japan. Demographic Changes and Macroeconomic Performance: Japanese Experiences. May 30, 2012.

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