Working Paper: Japan's Growth Path

Vistesen, Claus and Hugh, Edward (200x) - Is Japan Dependant on Exports and Asset Income to Grow? An Inquiry into the Growth Path of an Ageing Economy, Working Paper (provisional title)

[under construction, but below the formal impetus is given in the introduction]

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The world is ageing. Even in spite of the fact that we know the global population is to increase from its current 6 billion to around 8-9 billion towards 2050 perhaps the most striking feature of this process will thus be the change in age composition that accompanies it. To complicate matters in a research related context and as a blurred veil over the changing composition and size of the global population we have the inescapable fact that the demographic transition is not over. Curiously, this point is rarely emphasized in economic research which deals concretely with the effects of demographic changes on the macroeconomic environment. Yet, it seems clear that the processes of lingering low [1] and declining fertility as well as rising life expectancy which are the immediate drivers of the process of ageing do not have an obvious theoretical limit. Furthermore, in the case of fertility there does not seem to exist a state of balance (homeostasis) by which fertility stabilizes at replacement levels. On the contrary a quick glance across the global economic edifice will confirm that replacement level fertility rates in the context of the developed economies [2] is the exception rather than the rule. In many OECD economies fertility rates are well below replacement levels and have been for nearly three decades. More worryingly, the overshooting of fertility towards lowest low levels appears to have decisively hit a wide range of developing economies from the transition economies in Eastern Europe to emerging Asia. Also in the Middle East, Northern Africa (the Maghreb) and the Latin-American continent fertility rates are heading firmly towards replacement levels and given the global tendency we should not expect it to stop here. However, perhaps the most striking feature of the demographic transition is that occurs in different tempi across countries something which is bound to have important macroeconomic implications.

This paper builds its arguments in a concrete country context. Japan is thus, measured by median age [3] , the oldest society on earth as a result of more than three decades of below replacement fertility and a steadily rising life expectancy. In this paper we consequently ask the question of what this means for Japan’s growth path and more specifically the contribution of the different components of output to total output growth. More specifically the authors develop an econometric model to show the overall contribution of exports and income earned on foreign assets to total output growth over the period 1980-2007 (quarterly sample period) [4] . In the jargon of the literature we ask whether Japan is dependant on exports to grow. Furthermore the authors attempt to operationalize what in fact constitutes ‘old’ in a macroeconomic context by checking for structural breaks in the data set around the point where Japan’s median age breaches the 40 year threshold. Lastly, as a perspectivation this paper also asks whether in fact not Japan’s situation can be a proxy for an externality to the global economy and thus ultimately whether demographics can help shed light on the current global economic gridlock of global imbalances and excess liquidity?

The paper is formally structured in four sections. Section 1 begins in the well known tradition of standing on the shoulder of giants as it presents the theoretical impetus and framework for the empirical findings. Section 2 gives a brief helicopter tour of the subject in question Japan and its demographic development. Section 3 presents the data, the models estimated and the results from the estimations. Section 4 includes a perspectivation to the global economy as well as it concludes on the paper’s findings.

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[1] Here we can distinguish between two regimes; low fertility which would be anywhere between 2.1 (replacement level) to 1.6 and lowest low fertility coined by the Austian demographer Wolfgang Lutz which would be <1.6.

[2] OECD

[3] 43.5 in April 2007 according to the CIA factbook.

[4] Data set from OECD’s database.