Looking at Japan’s agenda for 2018, there are three major structural challenges confronting the nation. The first is responding to the rapid aging of the nation’s population with declining births.

Looking back on history, I do not know of any country or region that managed to prosper over the medium to long term despite a declining population. Many advanced economies have succeeded in achieving a V-shaped recovery in their total fertility rate by vigorously pushing measures to help people keep their jobs while at the same time raising children. France and Sweden are often cited for their success in bringing the fertility rates back to around 2.0 — after the rates had plunged to the 1.5-1.6 range — and that success is attributed to a policy shift away from the provision of mere economic support such as family allowances toward creation of an environment in which nursing care for children is beefed up and people are given an extensive choice in terms of giving birth, raising children and working.

The Japanese government has set a policy target of maintaining a population of 100 million or more over the medium to longer term. That requires a fertility rate of 1.8 — still 0.3-0.4 points higher than it is today. I would suggest that Japan follow the child-rearing support policies introduced in France, but that will likely cost fiscal resources equivalent to about 3 percentage points worth of consumption tax.

Supporting the elderly

To address the challenge of an aging population, the nation should give up the idea that the active working generations — with younger people at the core — will support the welfare needs of the elderly. The concept of welfare policy should be changed so that people’s age would no longer be the policy yardstick but all the people would support society and people in need — irrespective of their age — would be given increased benefits. In concrete terms, this would require a paradigm shift from income taxation to consumption tax plus the My Number system.

Concern is growing that the cost of nursing care for the elderly will be a huge problem when the postwar baby boomers start reaching the age bracket of 75 or older in five years. The only way to reduce the number of people requiring nursing care will be to extend people’s healthy life expectancies. Doctors say that it’s best for people to work longer to stay fit longer. If that is the case, the easiest solution would be to abolish the uniquely Japanese practice of mandatory retirement. That will not only keep people fit longer but also cut the number of those needing care. State finances on medical services and pension programs will turn for the better. Moreover, the abolition of mandatory retirement would spell the end to another uniquely Japanese system — seniority-based wages — naturally paving the way for the more common standard practice of equal work, equal pay. Ending the practice of mandatory retirement would kill three birds with one stone.

Boosting productivity

The second challenge is improving productivity. For a long time, labor productivity in Japan has been at the lowest level among the Group of Seven advanced economies. That is because the nation has not been able to shake off the successful experience of its past rapid growth period — when the factory manufacturing model in a growing population drove the Japanese economy. Under the factory manufacturing model, it made sense for people to work long hours because the production equipment — the machines — do not tire. Today, however, the weight of manufacturing in Japan’s economy has come down to about a quarter of the total.

The service industries — which are the mainstay sectors today — do not have production facilities. What’s needed is the human ingenuity to create new services. And what nurtures such creativity is not the kind of education that emphasizes uniformity — which may suit the manpower needs of factory labor — but education that focuses on diversity and encourages the unique character of individuals. At Ritsumeikan Asia Pacific University, where I serve as president, some 3,000 students coming from 89 countries and regions study alongside the roughly same number of Japanese students. Education is given in English and Japanese, and it is an institution best suited for building global human resources. The Japanese government has put work-style reform on its policy agenda because it realized that unless people’s long working hours are corrected and citizens are encouraged to study more, no fresh ideas will emerge and productivity would not improve.

Fiscal reconstruction

The third challenge is fiscal reconstruction and reclaiming the primary balance surplus. Japan’s national burden rate — which calculates total tax burden plus social security insurance premiums as a ratio of national income — is well below the OECD average and is one of the lowest among OECD members. On the other hand, its social security expenses — which account for a large part of the benefits — exceed the OECD average. While the burden should in principle be higher than the benefits, the benefits exceed the burden in this country, and the gap is being covered by issuing government bonds. This is a hardly sustainable structure. If the structure is left to continue, it is likely that about 30 percent of the government’s annual budget will chronically be spent on debt-servicing expenses.

That entails a serious problem from the perspective of legitimacy in democracy. As stated in the 18th century American colonialist slogan of “no taxation without representation,” the basic principle of democracy is for people to choose their own representatives to decide on how to use the taxes that they have paid.

When our children and grandchildren get the right to vote in the future, what will they think when they learn that about 30 percent of their tax money — which they should be able to distribute on basis of their own decisions — has already been set aside for us? Will they authorize us to use the money? I do not think they would — I’m afraid they will be offended.

This problem should lead everyone to be convinced of the need for an integrated reform of the tax and social security systems. As a first step, the government should set a new target of regaining the primary balance surplus and lay out a road map for achieving it. In order to keep up the current level of social security benefits, there will need to be a consumption tax of around 15 percent, and that the tax rate will need to be raised to around 25 percent if the nation is to aim for a generous social welfare system based on the European model.

Haruaki Deguchi is president of Ritsumeikan Asia Pacific University in Beppu, Oita Prefecture. A popular lecturer and the author of more than 30 books, Deguchi worked at Nippon Life Insurance Co. for almost 35 years before founding Lifenet Insurance in 2008.

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