Personal consumption, which accounts for more than half the nation’s gross domestic product and is an important locomotive of the economy, has been sluggish. Short-term factors behind the sluggish consumption are the termination of subsidies for the purchase of eco-friendly cars and the scaling down of the eco-point system for electric appliances.

Economists estimate that Japan’s GDP in the last quarter of 2010 suffered negative growth. Despite stimulus measures of the fiscal 2010 supplementary budget, the economy is expected to remain stagnant in the first quarter of 2011. It is generally believed that it will start picking up in or after spring.

There is a much more important issue than the short-term economic recovery that must be tackled. Attention must be paid to a problem that cannot be solved by stimulus measures and that causes people to fret about their future, thus negatively affecting the economy. The issue is Japan’s weakening social welfare system.

Many years have passed since Japan plunged into a low economic growth period after a high growth period, which laid the foundation for contemporary Japan. State finances are in bad shape with enormous debt owed by both the central and local governments. And the population is dwindling.

Given these factors, the weakening welfare system increases people’s worry all the more because welfare is the very thing that provides a security net for their lives.

Japan’s welfare system is based on the social and economic conditions that characterized its high growth period, in which the younger generations, the source of the workforce, continued to increase, thus further feeding the nation’s economic growth. But Japan must depart from the assumptions that have been taken for granted during its high growth years.

Japan’s population started to fall in 2005, and suffered a net loss of some 123,000 people in 2010, topping the record of 71,830 set in 2009. (In 2010, there were 1,194,000 deaths, a steep rise of 52,000 from 2009, while there were 1,071,000 births, roughly leveling off from the previous year.) The loss can be likened to the disappearance of a middle-size city in the countryside. In 20 years, Japan’s population is projected to shrink by some 12 million people from the current level.

The big problem characteristic of Japan’s population changes is that the percentage of younger generations will decrease as the number of people aged 65 or over rapidly increases. In 20 years, the workforce population will drop by some 14 million from the current level while the population of the elderly will increase by some 6.8 million.

About three working people are now supporting one elderly person. But in 20 years, two working people will have to support one retiree. In addition, the younger generation is having a hard time finding stable work, and the gap between rich and poor is widening.

Japan cannot rely on the current welfare system, which is geared to the high growth period. It must be reformed so that it can become sustainable in an age of low economic growth and a dwindling population.

Because of the rapid graying of the population, the nation’s welfare spending, which covers pensions and medical, nursing care and other services, automatically grows by ¥1 trillion each year. In the fiscal 2011 budget, welfare spending increased 5.3 percent from fiscal 2010 to some ¥28.70 trillion, accounting for 53 percent of general expenditures, which finance core policy measures. Because welfare spending will continue to increase it is imperative to find secure and permanent revenue sources.

In compiling the fiscal 2011 budget, the Democratic Party of Japan relied on ad-hoc revenue sources such as reserves in special account budgets and money belonging to local governments to overcome the difficulties in financing the child allowance and the increased government portion in the payment of pension benefits. Fearful of a loss of support for the DPJ in local elections, the government did not raise the out-of-pocket payment requirements for medical and nursing care services for fiscal 2011.

In discussing the long-term reform of the nursing care insurance system and of the health insurance system for people aged 75 or over, the government also refrained from proposing raising premiums or out-of-pocket payments. Instead, it focused on having a certain segment of society shoulder the increased cost.

The government should make efforts to spur the Diet to discuss ways to secure stable funds to finance the welfare system, such as raising taxes, insurance premiums and out-of-pocket payments.

The government also must cut both waste and redundancy from the welfare system and other budgetary items. At the same time, to maintain the welfare system, it should take care so that not only individuals but also enterprises will shoulder a fair burden. It also must take steps to prevent a steep rise in the burden for low-income people.

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