Commentary / Japan

Address Japan’s demographic, fiscal woes

by Haruaki Deguchi

The race to choose the president of the ruling Liberal Democratic Party begins next month. Under Japan’s parliamentary Cabinet system, the head of the majority party in the Diet is selected as prime minister. Just like the presidential election in the United States, the election of the LDP chief to a three-year term will effectively choose Japan’s leader for the coming three years.

What then are the key issues at stake in the race? From a long-term viewpoint of national strategy, the most important items on the agenda should be reversing Japan’s population decline and rebuilding the government’s fiscal health.

Historically speaking, I do not know of any country, region or civilization that has prospered with a falling population. Among the advanced nations of the world, the combined trends of an aging population with fewer births is progressing most acutely in Japan. We need to have a greater sense of crisis over the declining population.

The first and foremost effort needed to reverse the population decline is to boost the fertility rate. What is often cited in discussions over steps to increase the population is the three-point Chirac principle in France, which is as simple as the following: that having children should not mean having to incur new economic burdens, that day care facilities for children should be free of charge, and that women returning to work after childbirth and child rearing must be deemed to have been at work during the whole period of their leave — and employers must accept them as such. It is widely known that France, thanks to this principle, succeeded in raising its fertility rate by 0.4 points in just 10 years to around 2.0 births per woman.

In many advanced countries, there is a widely shared belief that children are the treasures of society and must be raised by that society as a whole. In this country, however, the burden of child rearing is still heavily placed on women. Japan must move with all urgency to establish mechanisms whereby society supports child rearing by parents — such as by cutting overtime work through work-style reforms, encouraging men and women to work together to raise their children and ensuring that day care services for all children are available for parents who wish to utilize them. I, for one, propose applying the Chirac principle to Japan unaltered.

This brings us to fiscal reconstruction. Since I currently serve as president of Ritsumeikan Asia Pacific University, I have to pay attention to public spending on education. According to UNESCO, Japan’s public spending on education in 2016 was 3.59 percent of the nation’s GDP, 105th among the 148 nations surveyed around the world. Such data may paint Japan as a stingy country that neglects to invest adequately in education — which defines the country’s future. But is that true?

Let’s take a look at some data on the nation’s fiscal condition. Japan’s fiscal expenditure was ¥70.3 trillion in 1991 — when tax revenue reached ¥61.8 trillion and the government bond issue hit ¥5.3 trillion. Among expenditures, tax grants and debt-servicing costs each accounted for ¥16 trillion, social security expenses ¥12.2 trillion, and other policy-related spending (including education, defense and public works projects) ¥26.1 trillion.

Twenty-seven years on, the government’s fiscal 2018 budget swelled to ¥97.7 trillion, an increase of ¥27.4 trillion. While tax revenue has fallen slightly to ¥59.1 trillion, the bond issue rose by as much as ¥28.4 trillion to ¥33.7 trillion. Of the expenditures, tax grants have slightly declined to ¥15.5 trillion and other policy-related spending to ¥25.9 trillion. On the other hand, social security spending has ballooned by ¥20.8 trillion to ¥33 trillion. And debt-servicing costs, despite the ultra-low interest rates, have increased by ¥7.3 trillion to ¥23.3 trillion.

These figures clearly show that Japan can little afford to set aside more money on policy-related expenditures, including education. As the nation with the world’s fastest aging population, Japan faces huge social security expenses such as medical services, nursing care and pensions that build up with each passing year. In other words, we cannot afford to invest more in education even if we wanted to. This applies not just to education; we are becoming unable to make any fresh policy investments.

We may run the risk of default if we try to curb debt-servicing expenses. Some may say the only choice is to cut social security spending. But is it a practical option to significantly cut social security expenses? The ballooning social security costs are attributable to the aging of the population, or a natural increase, so to speak. Attempts to reduce social security spending will have their limitations.

Meanwhile, the rate of people’s tax burden and social security premiums combined is 42.6 percent in fiscal 2015 — which was 28th among the 34 OECD members. On the other hand, per capita social security benefits in Japan (in 2013) was 18th among OECD members. This means that we are a country that imposes a relatively low tax/social security burden on the people while offering medium-level benefits. This can hardly sustain the social security system. No wonder the government is incurring more debts by issuing more bonds. And the nation’s outstanding debts have reached roughly 200 percent of GDP — already close to the level in the closing days of World War II. Of course, it is by far the worst among major industrialized economies today.

A candid look at the data makes me think that the only way for our nation to survive would be to rebalance the people’s tax burden and social security benefits, and raise taxes to levels where we can start to make new policy investments. I welcome any advice on better options. But we should realize that there is no magic wand to resolve this problem. No citizenry in the world would welcome tax increases. But it is the duty of politicians to carry out policies in the long-term interest of the nation, no matter how unpopular.

The media should approach the upcoming race for the LDP presidency from the viewpoint of exploring the nation’s long-term strategy, and should do its best to encourage the candidates to engage in active and substantial policy debates on the issues that are essential to our future.

Haruaki Deguchi is president of Ritsumeikan Asia Pacific University in Beppu, Oita Prefecture. A popular lecturer and the author of more than 30 books, he founded Lifenet Insurance in 2008 after a career spanning nearly 35 years at Nippon Life Insurance Co.