Older People and Aged Society in Japan #2 Japan as a Super-Aged Society: Economy and Finance

 At the International Longevity Center, we have numerous opportunities to visit other countries and speak with local experts and researchers for our international comparative studies. Many of these researchers would ask us such questions as, “What’s the situation with Japan’s consumption tax?” and “What does the government’s debt look like?”

 

As each country provides support for older people under great fiscal pressure, they must be interested in learning about the economic and financial situation in Japan, the leading super-aged society in the world.

In this post, I would like to give a quick recap on this topic.

 

Japan’s GDP

Japan’s economy hasn’t looked good for years. For example, the proportion of its GDP in the global total decreased from 17.6% in 1995 to 8.6% in 2010, and further to 4.2% by 2022 (Cabinet Office: System of National Accounts and Choice for the Future). With prolonged deflation, Japan has been left behind in the global growth.

 

The graph below shows real GDP per capita in Japan and several other countries from 1991 to 2021. You can see that Japan’s growth has been extremely slow. Factors often identified as contributors to the slow growth include a decline in the working-age population, the industrial structure losing flexibility, low labor productivity, and inefficient research and development.

  

 Source: Cabinet Office, Annual Report on the Japanese Economy and Public Finance

 

 

National Budget

Japan is facing a super-aged society in such economic condition. Naturally, as you can see in the following table, the social security expenditure makes up a large portion of the budget, and the national debt is enormous.

 

Japan’s FY2024 Budget

Expenditure (in billions)				Revenue (in billions)
General Expenditure	67,776.4	60.2%		Tax Revenue	69,608.0	61.8%
(Social Security Expenditure)	(37,719.3)	(33.5%)		Other Revenue	7,514.7	6.7%
(Non-Social Security Expenditure)	(29,057.1)	(25.8%)		Government Bonds Issuance	35,449.0	31.5%
(Contingency Fund)	(1,000.0)	(0.1%)		(Construction Bonds)	(6,579.0)	(5.8%)
Local Allocation Tax Grants, etc.	17,786.3	15.8%		(Special Deficit-Financing Bonds)	(28,870.0)	(25.7%)
National Debt Service	27,009.0	24.0%		Total	112,571.7	100.0%
Total	112,571.7	100.0%

Notes:

* Figures may not add up to the total due to rounding.

* Contingency Fund: for measures to address soring crude oil and commodity prices and to set up the environment for promoting wage increases

* National Debt Service:  repayment of principal and interest expense

(Source) Ministry of Finance, Highlights of the FY2024 Draft Budget

 

 

The social security expenditure (mainly for pension, medical and health care, and long-term care)  constitutes a large portion, around 1/3 (33.5%),  of the country’s total budget.

Public pension is based on a pay-as-you-go system, with 25% of the cost paid by the national government. Medical care is based on a health insurance system. The national and local governments cover 38% of national medical care spendings, of which 61% is used for people aged 65 or over. Long-term care is mostly for older people and is operated under the national long-term care insurance system. Public funds by the national and local governments are responsible for 50% of the costs.

For pension, working-age people play a key role in supporting the pay-as-you-go system. For medical care, health insurance societies mainly for the working-age population support the societies mainly for older people. As for the long-term care insurance, although the system also covers people aged 40 to 64 to a limited extent, its resources are mostly used for those aged 65+. We therefore have good reason to worry about intensifying conflict between generations.

 

 

Turning to the debt, the national debt service (repayment of principal and interest expense) accounts for 24% of the total expenditure in the FY2024 budget,

and the special deficit-financing bonds constitute 25.7% of the total revenue. This is because the government debt has grown so huge that the country constantly relies on government bonds to finance itself.

According to the Global Debt Database (GDD) by the IMF, the following countries had national debt larger than their GDP in 2022: Japan (261.29%), Greece (177.43%), Venezuela (157.81%), Italy (144.41%), the US (121.38%), Portugal (116.05%), Spain (111.98%), France (111.67%), Canada (106.59%), Belgium (105.27%), and the UK (101.36%).

As you can see, Japan's government debt is exceptionally large. When we visited the Netherlands on a study tour, one of the researchers asked me about this topic, so I shared these data. The researcher looked stunned at it, saying, “No wonder why the Japanese yen has fallen so much!” While the mechanism of currency fluctuations may not be that simple, the fall of the Japanese yen seems to be well known.

  

Taxes

According to the Ministry of Finance, Japan ranked 11th across the world in social security expenditure, 31st in non-social security expenditure, and 29th in tax revenue as percentages of GDP. With insufficient tax revenue, Japan has relied on debt. Drastic tax reforms seem difficult to materialize as the country has faced prolonged deflation and kept raising social insurance premiums.

As an example, let me share with you OECD data on consumption (value-added) tax rates in selected countries. While the rate was 10% in Japan as of FY2022, it was 19% in Germany, 20% in France, 20% in the UK, 21% in the Netherlands, and 25% in Denmark.

 

I think it was during a study tour to the UK a few years ago. In an interview, a local care professional asked us about the consumption tax rate in Japan. As we gave them the answer, the entire group in the room was stunned into silence for a moment, and then burst into laughter. From non-Japanese people’s viewpoint, relying on debt seems really strange.

 

 

Older People’s Roles

According to the Annual Report on the Ageing Society by the Cabinet Office, households headed by people aged 60+ accounted for 63.5% of Japan’s total financial assets in 2019. This figure suggests that banks in Japan use older people’s financial assets to purchase government bonds.

You may therefore get the impression that funds are smoothly circulating within the country, using assets accumulated during the period of high economic growth. However, Japan’s case is rather exceptional, for the country became wealthy before facing a super-aged society. This model also seems ineffective for vibrant and steady growth. Since it strongly relies on support from the working-age population, the country looks as if taking an inward-looking approach to prolonging its life. Depending on the direction of the economy, it may no longer be possible to purchase government bonds as in the past. It is not clear whether the government debt service can maintain the current level in the budget.

As I mentioned in my first post “Japan as a Super-Aged Society: Health and Work among Older People,” Japanese seniors generally stay active and watch their health in an super-aged society. Considering all these factors discussed in this post, they are expected to play a more active role.

It does not necessarily mean that all older people should become super seniors. But there are lots of opportunities for them to play an active role, for example in production in certain industries. In medical and long-term care, there is much room for improvement, aiming to focus on older people’s well-being rather than service delivery itself. Older people will also play a greater and more important role in their communities.

 

 

(References)

·       Cabinet Office: Annual Report on National Accounts (2022); Report by Committee for Japan’s Future: Explanations and Reference Material (2015); Annual Report on the Japanese Economy and Public Finance (2022); Annual Report on the Ageing Society (2023).

·       Ministry of Finance: Highlights of the Draft Budget (2024).

·       Ministry of Health, Labour and Welfare: Financial Report on the Public Pension System (2022), Overview of National Medical Care Expenditure (2022), Benefits and Contribution in the 110th Subcommittee on Long-Term Care Insurance (2023).

·       International Monetary Fund: Global Debt Database (2022).

·       Ministry of Finance: Giving Thought to Japan’s Finance.

·       OECD: Consumption Tax Trends (2022).