Are demographics indeed destiny?

 A Tale of Two Asian Giants

The graph below definitely is a strong contender for ‘chart of the year 2024’. For the first time, interest rates on long-term (30 years) Chinese government bonds fell below Japanese ones. This move is a reflection of economic weakness in China with expectations of increased monetary easing. A stark contrast with Japan's gradual policy normalization.

 

The low 30-year interest rates (below 2.5%) in both countries reflect their uncertain economic outlooks.  While Japan and China have their specific challenges, they share deflationary pressures combined with slow(ing) economic growth. This could be traced back to the dire demographic situation they find themselves in. Rapid aging in China (a consequence of the one-child policy) and a shrinking population in Japan place significant strain on their societies. Some even argue it is the single most important driver of countries’ economic growth and government budgets.

 

The question of whether demographics are indeed destiny has long intrigued economists and policymakers. While factors like technology and institutions play crucial roles, demographic shifts, particularly in population size and age structure, can significantly impact a nation's economic trajectory. We explore this by contrasting the experiences of these two Asian economic powerhouses: Japan and China.

 

Japan, with its rapidly aging and shrinking population, offers a glimpse into the challenges of a declining workforce. Its population peaked in 2007 and has been declining since, with a shrinking working-age population and a growing elderly population. This demographic shift has coincided with a period of economic stagnation, with real GDP growth in 2024 at just 0.32%[1]. An IMF staff paper estimates that Japan's economic growth will decline by 0.8% annually over the next 40 years due to demographics alone[2]. This decline is attributed to a shrinking labor force, lower savings rates, and increased age-related spending.   

 

Despite these challenges, Japan has implemented innovative policies to mitigate the negative impacts of its demographic shift. These include promoting active aging, encouraging lifelong learning, and supporting older workers through reforms to pension systems, healthcare systems, and labor markets. This way, Japan hopes to empower seniors to stay active, contribute to the workforce, and maintain meaningful roles in society. However, the long-term economic implications of Japan's aging population remain a concern.   

 

In contrast, China enjoyed decades of rapid economic growth fueled by a large and young working-age population. Since opening up its economy in 1979, China's GDP growth has averaged over 9% annually, lifting millions out of poverty. However, China's population is now aging, and its economic growth has slowed in recent years. The one-child policy, implemented in 1979 to control population growth, has contributed to this demographic shift.   

 

While China still benefits from a "demographic dividend" with a large working-age population, this advantage is diminishing. Projections suggest that China's economic growth could slow to just 1% by 2035[3] due to population aging and depopulation. This slowdown will be driven by a declining labor force, lower savings rates, and increased age-related spending, mirroring Japan's experience.   

 

Recognizing these challenges, the Chinese government is transitioning to a new growth model that relies less on investment and exports and more on consumption and innovation. However, adapting to an aging population requires significant policy adjustments, including increased investment in healthcare and pension systems, as well as reforms to encourage longer working lives and increased labor force participation among older workers.   

 

The experiences of Japan and China underscore the profound impact of demographic shifts on economic growth. Either way, their demographic backdrop is likely to keep economic growth and interest rates in check for some time to come.

 

[1] https://www.statista.com/statistics/263607/gross-domestic-product-gdp-growth-rate-in-japan/

[2] https://www.imf.org/en/News/Articles/2020/02/10/na021020-japan-demographic-shift-opens-door-to-reforms.

[3] https://www.prcleader.org/post/china-s-aging-problem-will-be-much-more-serious-when-urbanization-is.