Japan economy to shrink as population ages

TOKYO (Reuters) - As Japan's population gets greyer, economic policies will have to adjust to the nation's shrinking work force.

Akihiko Matsutani, a professor at the National Graduate Institute for Policy Studies in Tokyo, answered some key questions facing the world's second-largest economy:

Q: What will happen to Japan's economy as its work force shrinks?

A: "Japan's economy has been expanding since the end of World War Two. But from now on, Japan's population and the number of workers will decline sharply to the extent that cannot be offset by improved technology, so the economy will shrink.

"Yet Japan's economy, society, and fiscal and pension systems are still based on a premise that the economy will keep on growing and that approach will soon not work. We need to seek fundamental changes to the current economic, fiscal systems as well as how companies operate."

Q: Does it necessarily mean a pension crisis as workers fail to fund rising payouts?

A: "The current pension system will not work as the number of people aged over 65 rises sharply, while the number of people who pay for the pension system declines. We can either reduce the amount that pensioners receive or increase the amount of pension fees, or both. But even so, the system needs to be revised frequently to work, making it hard for pensioners to plan ahead.

"The pension system should no longer be the core of Japan's social welfare policies. We could diversify social welfare steps. For instance, a growing number of Japanese people will not be able to buy a house as the lifetime employment system fades, making it hard for them to commit to housing loans that last 20 or 30 years.

"So the government could provide cheap housing to the elderly. It will cost a lot when we build that housing, but in the long term it will reduce the burden on young people. We need a framework that works for 50 to 100 years as Japan ages, not a patchwork of half measures."

Q: How about threats to Japan's fiscal health, already the worst among major industrial nations?

A: "As the work force shrinks, the ability of each individual to pay taxes will decline in the economy. Even if we raise taxes by the same amount as in the past, the number of people who will be paying those taxes will decline and each taxpayer will face a bigger burden.

"In the past, we expected tax revenues to rise as the economy grew or we thought we could afford the government spending by raising taxes. But we need to change that thinking.

"Fiscal spending needs to decline as the population shrinks. Otherwise, it will lead to limitless tax hikes and the country will collapse."

Q: The government is pushing for higher productivity to cope with the shrinking work force. Can that help?

A: "Even if Japan boosts productivity as it did during 1980-95 when information technology improved, I expect the impact from the shrinking work force will be bigger.

"The government is talking about overcoming the situation by boosting productivity, but it is impossible to boost productivity enough to prevent the economy from shrinking.

"We should not limit our debate to what the Japanese people or companies should do for the Japanese economy. We should open up more to foreign companies and let them compete with Japanese companies within Japan. That will help develop technologies or new products in Japan."

Q: What should the government do to get more women, elderly and foreign workers into the work force?

A: "If we want to benefit from getting women into the work force, we need to change our corporate structure to one where women can best demonstrate their ability.

"The current thinking is that we need to get women and the elderly in the work force as the pension system is about to collapse. We should not create a society where we force those people who don't want a job to work.

"We cannot offset the shrinking work force by bringing in more foreigners to work. The step could delay the timing of Japan's economy starting to shrink due to the declining work force. But unless we need to make fundamental changes to economic and fiscal systems, bringing foreign workers into play will not be a long-term solution."