The Standard & Poor’s ratings downgrade of Japan’s bonds should have been no surprise, as Japanese political leaders are claiming; according to the Wall Street Journal today, “Japan’s government debt ratios, already among the highest for rated sovereigns in the world, will continue to rise further… and peak only in the mid 2020s.” Nor should we be surprised if short term fiscal fixes are not very satisfying, as hinted in the final graph of the story: “Spending is likely to soar even faster in coming years…as the rapidly aging population leads to increased outlays for pensions, health care and other government entitlements. The government’s savings pool is being drained by a combination of more retirees and fewer workers due to a low birth rate.” Not exactly new. Nor will these core structural challenges be met simply by political tweaking of budgets at the margins.
For months S&P had been reporting this, beginning with its October “Global Aging 2010 Report: An Irreversible Truth.” It wrote of “significant deterioration in public finances for OECD countries, including Japan, unless structural policy reforms are undertaken.” On November 10, the Japan Report was titled: “Absent a Policy Response, Japan’s Graying Population Could Imperil Its Sovereign Ratings.”
The data are stunning, taking into account longevity, low birthrates ,and the particular population bulge of Japan’s post World War II baby boomer effect: "The median age in Japan in 2009 was 44.4, the world's highest, followed by Germany (43.9) and Italy (43.0). Japan's median age will reach 55.1 years in 2050, second only to China. As such, the country's old-age dependency ratio will rise even faster than for the global population. Overall, Japan’s share of the working-age population will fall to 51 percent by mid century, from around 65 percent today.”
It is this “old-age dependency ratio” which is the most profound driver of Japan’s debt issues. But the most significant takeaway from the S&P announcement, found even in a recent World Bank Report, is that Japan is just the tip of the iceberg for most of G-20 countries as a consequence of the structural shifts that aging populations promise for the 21st century. And nowhere have we begun to change how we live to align to these new realities.
Over the next two decades, Japan’s fiscal crisis born of its structural population aging challenge will be repeated first in South Korea, Germany, Italy, and Spain, and closely followed by the likes of Australia, Brazil, Canada, the UK, China and the U.S. As Dr. Adele Hayutin of the Stanford Center on Longevity has been saying, “Population aging is one of four major trends shaping our present and future. The realities of these population age shifts require new strategies. Using the lens of population age shifts will give decision makers a new set of perspectives and help frame questions … affecting economic prosperity, social well being and national security.”
The S&P ratings for Japan is cause for no less than a G-20 call to action of this common, structural challenge to all of its economies’ fiscal sustainability in the 21st century.
Michael W. Hodin, Ph.D., is Managing Director, The High Lantern Group and Executive Director of The Global Coalition on Aging.
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