A Fast Aging Welfare Society of Japan and Its Implications on the Government Debt and Economic Growth

Japan’s economic recovery after the Second World War was once called an economic miracle, and high economic growth rate led Japan to the position of the second largest economy in the world next to that of the United States. Japan was indeed No. 1 in many fields in the 1980's, and some futurists predicted that the 21st century would be the century of Japan. The rise and fall is inevitable for any great empires including the Roman Empire, the British Empire and many Chinese or Korean dynasties. Japan’s rise and fall seems to be no exception, only the rise lasted too short. Japan is facing many serious problems including that of fast aging of population, very low economic growth rate, huge government debt outstanding which is now much higher than 200% of GDP. The Constitution of Japan clearly declares that she is a welfare state and its Article 25 says “All people shall have the right to maintain the minimum standards of wholesome and cultured living in all spheres of life, the State shall use its endeavors for the promotion and extension of social welfare and security, and of public health”. The combination of fast aging of population and the welfare state necessarily increase the social security expenditures enormously. Japan has at the same time lost strict fiscal discipline and in spite of Article 4 of the Finance Law which strictly forbids the reliance on borrowed money for the government expenditures except for the government investment expenditures, the government has been borrowing every year more than tax revenues and a large portion of borrowed money is used for the current expenditures which is clearly violation of Article 4 of the Finance Law. The government has to pass a law every year to borrow money for current expenditures as an exception to Article 4 of Finance Law. The pension plan is almost bankrupt and many more people demand for the payment of so-called livelihood protection or Japanese public assistance system. On the other hand, the high economic growth period of the 1960’s, 1970’s and 1980’s has become a past dream and Japanese economic growth rate has been very low since the 1990’s. Japan has fallen to the third position in terms of GDP after China and per capita income is falling continuously. Once a very high saving rate of Japan is a past story and what little saving made is invested overseas and not in Japan. Thus the capital formation and the labor productivity have been sluggish leading to lower living standard for Japanese people. These factors Japan is currently facing are closely interrelated. In this paper the author will report on each factor in detail and probe for possible solutions of these serious problems.