I wrote several times in 2008 on Japan's secular economic decline, determined by the developed world's worst demographic outlook. Over the next 20 years, the workforce will decline by 20%. Five years ago, the population was 127.7 million, today it marginally lower, but  the composition has changed radically.  In 2004, the population below the age of 15 was 17.7 million, the population aged 15 to 64 was 85.1 million and the population aged 65 and over was 24.9 million. Now, the population below the age of 15 has dropped 3.5% to 17.1 million, the population between 15 and 64 has dropped 4% to 81.6 million, while the number of people older than 65 has increased 16% to 28.9 million. This devastating trend is set to accelerate over the next decade, with the working age population declining by 0.9% a year, implying a major drawdown of Japan's savings mountain, with adverse implications for global markets reliant on Japanese excess saving as well as for the Yen and JGB yields. The household savings rate as a % of disposable income has fallen to 2% from 14% in the early 1990's at the beginning of Japan's long decline, while government debt will probably hit 200% of GDP by next year.

The country's birthrate has plummeted since the 1950s and has been below replacement level (2.1 births per woman in developed countries) for decades. Today it is at a mere 1.2 births. As a result, Japan now has the highest proportion of residents over the age of 65 (20 percent) in the world, and the health ministry estimates the country's population will decline by 25 percent by 2050 despite rising life spans; (Russia will be similarly depopulated over that period).

By 2050, 40 percent of the population would be over 65. Where Japan has led, the rest of the developed world will soon follow with a steep drop in the global birthrate since the 1970's that has resulted in a rapidly aging population and workforce in Europe, Japan, and soon too in the US (which has been spared by Latin immigration). Not only does this have direct economic implications on household formation, demand for durable goods etc, but it has a cultural impact too, making a society more conservative and averse to risk-taking. It's a phenomenon that strikes me whenever I travel from youthful and dynamic London to cities in Europe like Vienna or Munich with a much older population on average, which are impressively prosperous but also stultifying. Globally, the world's birthrate looks set to drop below replacement level between 2040-50, although population will still rise for some time after as longevity extends.

Many economists believe that a falling birthrate initially provides a "demographic dividend" to an economy as the resources that might go into child rearing get diverted elsewhere, but the long-term consequences are anything but a bonus. The first problem is the strain on the country's pension system as fewer workers support more retirees ie a rising dependency ratio. Next, Japan and other countries with rates well below replacement level (Italy, Germany and Spain, for instance), are likely to start experiencing labor shortages--a far cry from today's worry about rising unemployment. That means that the average worker will have to become that much more productive just to support current levels of spending on pensioners and other demands. Incremental growth in the economy will require even bigger productivity gains from workers.

A shrinking and aging workforce also translates into a loss of innovation and entrepreneurial activity that's not easily replaced. Older workers likely to be more conservative and less risk-taking by nature, and additionally when a growing share of a country's gross domestic product must go to support retirees, that crowds out investment in new ventures.  In countries like Japan and Italy children are rapidly disappearing from much of society, with schools closing and playgrounds empty.  As a homogeneous and chauvinistic society, the Japanese have resisted one rapid action to boost population, which is opening up their doors to more immigrants. Indeed, as unemployment has risen in the current downturn the Japanese have done the opposite, which is to send some foreign workers home. Japan's population problems are already so acute that it would take a massive influx of many millions of foreign workers to make much difference, and that's politically very unlikely. At some point, the markets will suddenly realize that the Yen at sub 90 to the USD and 10 year JGB yields at 1.3% are anomalies in the context of Japan's deteriorating economic fundamentals.