Why Monetary Stimulus Is Less Effective In Japan

After peaking at 128.06 million in 2010, Japanese population has been on the decline every year. It is projected to come down to 86.74 million by 2060. Japan’s National Institute of Population and Social Security Research has predicted that the country would be losing more than 700,000 people a year by 2025 and more than a million a year by 2060.

According to Futoshi Ishii, Director at the Institute the trend would continue for decades to come. Projections indicate that the size of the annual decline will keep getting bigger before peaking somewhere between 2060 and 2070. According to the latest statistical revisions, Japan’s native population stood at 126.163 million at the turn of 2015, which was lower by over 270,000 from a year earlier.

old japanese people
Source: acelebrationofwomen.com



At this rate, Japan will be overtaken by Mexico as the 10th most populated country in the world in just a few short years. With a consistently low birth rate, the population is not just contracting but also aging. Senior citizens now account for 26 per cent of the people, more than at any point since records began in 1950. Around an eighth of the population is 75 or over, and those older than 65 now outnumber under-15s by two-to-one.

This in turn impacts the economy with more spending on healthcare and fewer young people joining the workforce. Ultimately growth in Japan will suffer.

Economists theorize that Japan’s inverted age pyramid may explain why its economy has failed to respond to stimulus measures. There are three key reasons why monetary stimulus tends to be less effective in such nations:

1. Older people’s consumptions patterns are less sensitive to interest rates as they are attempting to run down their savings before they die. If interest rates increase, there is not really an incentive for them to increase their savings.

2. Older people tend to be creditors rather than debtors in Japan, meaning they are less reliant on credit. The credit channel of monetary policy, or the channel that relies on increasing or decreasing the availability of credit, is thus less effective.

3. Elderly people tend to hold their assets in bonds rather than stocks. For elderly people there is not an incentive in holding risky assets, such as stocks because there is a very high chance that they will never be able to spend the results from these returns.