Japan must confront the real Threats posed by its declining Birthrate

Tomijiro MORITA Vice Chairman, Nippon Keidanren Chairman of the Board, The Dai-ichi Mutual Life Insurance Company

The Japanese stock markets have experienced sharp declines since the start of the year. Needless to say, the subprime loan issue originating from the United States has been one of the main factors in this, but it is far from being the sole reason.

Before the subprime loan debacle broke out, many observers had noted the fragility of economic growth in Japan and its over-dependence on exports. In what appeared to be a reflection of this concern, Japanese share prices plunged by 11% on a year-on-year basis in 2007: a solitary decline among stock markets worldwide. Revisions to Japan's Building Standards Law cast further major shadows over its economy last year, restricting housing and capital investment, and leading to a downturn in an already weak domestic demand. As a result, real economic growth for fiscal 2007 is set to decline sharply to around 1.6% from 2.4% in 2006.

Weaknesses in Japan's domestic demand in 2007 would have been unquestionable, even without the subprime loan crisis or revisions to the building code. These weaknesses appear to be a fundamental factor in Japan's inability to shake off deflation, despite the fact that Japan has sustained growth since February 2002. In short, along with the subprime loan crisis, the structural problem of stagnant domestic demand in Japan has destabilized the stock market and triggered fluctuations in interest and exchange rates.

Simply put, Japan's declining birthrate is the most important cause of its sluggish domestic demand. Its working-age population began to fall in 1996 and as soon as the following year, 1997, net sales achieved by department stores and supermarkets nationwide began to fall on a year-on-year basis (figures based on existing stores). Net sales for daily necessities such as foods and beverages also slowed and domestic sales of new cars declined. As this and other data suggests, personal consumption in Japan continues to face downward pressure. As the decline in the working-age population gains speed, this trend is set to increase.

Future growth strategies are unlikely to prove effective unless they address this point head on. Therefore, in addition to developing effective strategies, in order to avoid problems becoming ever more serious, we must take a new look at measures to counter the declining birthrate.