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Financial pressures mount as Japan's population ages

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Elderly and middle-aged people exercise with wooden dumbbells during a health promotion event to mark Japan's 'Respect for the Aged Day' at a temple in Tokyo's Sugamo district, an area popular among the Japanese elderly, Japan, 19 September 2016 (Photo: Reuters/Toru Hanai).

In Brief

Japan’s economy has been in a growth phase since December 2012. Corporate earnings have reached record highs, and the job opening-to-application ratio has improved to a level not seen in the last 44 years. But during the same period, general government gross debt has grown at a pace exceeding the economic growth rate. It reached 239 per cent of GDP in 2016 — the highest such rate in the world.


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An important contributor to the debt problem is the growth in social security expenses for medical and nursing care. Medical- and nursing-care benefits in the 2015–16 fiscal year grew 1.3 and 1.6 times respectively over the previous 10 years. Nominal GDP during that same period marked time for the most part. Relative to the scale of the economy, growth in medical- and nursing-care expenses is phenomenal. One third of the resources for Japan’s National Health Insurance is provided by public funding (tax and fiscal deficit),and a major element in Japan’s fiscal deterioration (public funding of the National Health Insurance scheme accounted for 6.4 per cent of GDP in the 2016–17 fiscal year).

The biggest challenge for Japan — a leading consequence of population ageing — is to maintain the sustainability of its social security system given increasing medical and nursing costs. The ratio of Japan’s population over the age of 65 (the aging rate) was 28 per cent as of February 2018 — far in excess of other Asian nations. The United Nations and the World Health Organization define ageing rate levels as follows: over 7 per cent is considered an aging society, over 14 per cent is an aged society and over 21 per cent is defined as a super-aged society. Japan passed the point of super-aged society in 2007, and the ageing rate is expected to grow to nearly 40 per cent by the year 2065.

To begin the process of fiscal consolidation, the Abe Cabinet plans to reform the medical- and nursing-care systems. By making medical- and nursing-care data more easily available and usable, the Cabinet hopes it will be easier to understand where and when individuals’ medical and nursing issues may emerge, producing incentives for insurance subscribers and individuals in general to make use of preventative medicine and improve health outcomes. The availability of data should also make excessive costs more apparent, and encourage healthcare providers to keep expenses down. In line with cost reduction efforts, the government is aiming to promote the use of generic drugs and a drastic review of the drug pricing system to combat rising drug costs.

The effects of these reforms are expected to become evident over time, but there are nonetheless people and organisations that are searching for ways to increase the effectiveness and pace of reform. Since it is not possible to predict with any accuracy the degree to which medical- and nursing-care expenses can be kept under control, the government needs to aggressively pursue reforms that it can immediately realise, such as prioritising and optimising benefits as well as rethinking the balance of benefits and contributions.

An especially big challenge is how society can continue to take on the burden of growing social security expenses in the future. The government has been reviewing the system with an eye to basing contributions on ability to pay rather than on age, but the pace of reform in this area has been slow, due at least in part to the tendency to think of the elderly as being weak. The co-payment rate for medical services averages 30 per cent, but it drops to 20 per cent for ages 70 to 74, and to 10 per cent for people over age 75.

A new expression is becoming popular in Japan: ‘the era of the 100-year life’. Some even say that the elderly seem five or 10 years younger than their actual age. So it’s important that the government create an economic and social system in which people continue to work regardless of their age (assuming they are willing and able to do so).

In order to provide a public pension plan that is compatible with the diverse work choices of the elderly, the government is considering setting the pensionable age at 70 or older. Considering the extension of healthy life expectancy, the government could also consider raising to 65 the age at which pensions are awarded.

As for the cost of social security being borne by society as a whole, the rate of the value-added tax (which is supposed to pay for social security) will need to be raised. This tax rate is now at 8 per cent, and the government plans to raise it to 10 per cent in October 2019. But even this will not make up for the lack of social security funds. If reforms in the social security system do not go far enough, it could become necessary to raise the value-added tax rate to around 20 per cent by 2040, assuming that public expenditure is provided by revenue from the tax alone.

Raising the value-added tax is a major public issue, and doing so could cause political difficulties. But if the government continues to delay raising the tax rate, the structure of Japan’s social security system — a major contributor to its massive budget deficit — will remain unchanged and the sustainability of the system will come seriously into question.

Keiji Kanda is a senior economist at the Daiwa Institute of Research, Japan.

This article appeared in the most recent edition of East Asia Forum Quarterly, ‘Peak Japan’.

2 responses to “Financial pressures mount as Japan’s population ages”

  1. What happened to the lost generation of Japan who couldn’t get jobs from 1991 to 2001 and now includes 2001 to 2010? They were a lost source of revenue to alleviate the financial pressure.

  2. Perhaps it was a lack of space but the author could have noted some other elements in his analysis.

    For example, Japan’s medical system makes extensive use of hospitalization as a way to intervene in illness. Whereas medical doctors in other countries try to treat more people on an outpatient basis the Japanese doctors typically hospitalize someone. Whereas medical doctors in other countries keep people in hospital for as short a time as possible Japanese doctors often keep people in hospital for much longer periods of time.

    The increased use of generic drugs is a valid point. Some European countries and Canada more tightly regulate drug prices. So much so that some Americans purchase their medicines online from Canada. In the USA some large health care systems like the Veterans Administration negotiate much lower drug prices for its patients. There is talk in the USA about Medicare doing likewise but the pharmaceutical industry is fighting this because it would mean lower profits.

    Raising the age when people would be eligible for pensions is a very good idea. But then the society, especially corporations, would have to adjust its thinking about keeping people working past the age of 60.

    Finally, nothing is noted here about the very low birth rate in Japan. Admittedly, that is a topic for another analysis. But the government needs to do much more to encourage young people to marry and have more than 1 child.

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