Written By: Milja Mieskolainen
1. A forecast of Finland’s population development (source: Statistics Finland)
Japan’s demographic changes over the past three decades have slowed economic growth, and increased pressure on the dependency ratio (The World Bank 2020). The age structure of the Finnish population is following almost the same path as a result of declining birth rates and aging. The problems faced by Japan can be used as a kind of projection of the future of the Finnish economy. Gross domestic product, which measures domestic production, is used as a measure of economic growth. The text also addresses other indicators that reflect the effects of population aging on different sections of society. The aim of the text is to form a sound whole of the intersections of the two economies, and to present perspectives for improving the situation.
2. Finland’s population’s age structure in 2019 (source: Statistics Finland)
The history of Japan and Finland from the beginning of the 20th century contains intersections that also contributed to shaping demographic trends in a similar direction. The First and Second World Wars, for their part, were major trendsetters for economic development, but also for the structure of the population. Of course, the population of Japan is about 23 times higher than in Finland, which causes huge differences, but the pictures presented here show the existence of similarities. A larger population also means that change happens more slowly, but small movements and decisions have a much greater impact.
3. Japan’s population’s age structure in 2018 (source: Statistics Finland)
Before we go into the reasons for this similar development, we will look at the current situation and try to predict Finland's future.
As the population ages, public expenditure and government indebtedness increase as the productive potential of the national economy decreases. Of the industrialized western countries, Japan is considered to be the longest in the cycle of aging, to which Finland is drifting at a rapid pace. Japan faced a debt crisis in the 1990s and has been plagued by several financial market problems for years, causing a budget deficit for more than 20 years.
4. Japan’s population’s age structure in 2010 (source: Exploring the World)
If we compare Figures 2 and 3, we can see that the population structure in Finland is currently considerably more favorable than in Japan. There are still relatively more people of working age and the share of the largest age groups is slightly lower. Reasons for this may be, for example, increased immigration to Finland and a shorter life expectancy of the Finnish population. This is the situation at the moment. If we compare Figures 3 and 4, we find that Japan was in the same situation as Finland is currently about 10 years ago. According to several forecasts, in 10-15 years Finland will be in the same situation as Japan is currently.
Next, we will discuss the causes and consequences of similar developments within the two countries.
The age groups born in Japan after the Second World War were relatively larger than in Finland, which is why the demographic development of Japan can be considered “above”. As living standards improved in developed countries since the 1950s, birth rates in both Finland and Japan began to decline significantly. Since this decline, Finland has seen a small recovery, which sadly has already dissipated. Another reason for Japan's economic growth to stagnate and its population to age is the lack of a recovery movement like Finland's.
5. GDP development in Finland and Japan (1960-2018)
It is clear that the aging of the population has left its mark on the Japanese economy, but figuring out what that mark is - is challenging. There have been a number of ongoing global trends that have shaped the economic development of each country. Examples of these are globally slow productivity growth and low corporate investment, both of which have highlighted the disadvantages of aging.
Japan is clearly lagging behind both Finland and other developed countries in comparing GDP growth. If we compare economic well-being with GDP per capita (Figure 5), we can see that the standard of living in Finland has risen by 40%, while in Japan it has risen by only 15%. However, it is important to remember that these comparisons are distorted by demographic differences: the development of Japanese production has not lagged behind the United States, for example. GDP is also not a perfect measure, so the differences it shows should be treated with some caution.
6. Population dependency ratio in Finland and Japan (1960-2018)
The population dependency ratio (Figure 6) describes the number of children and the elderly in relation to 100 working-age people. In Finland and Japan, the dependency ratio is burdened by a large number of elderly people, as the birth rate has been declining for decades. The population dependency ratio is an important indicator, especially when examining the financial situation of public finances. In this comparison, too, the differences between Japan and Finland must be kept in mind: in Japan, the defined benefit pension system is stricter than in Finland and in Japan, the personal responsibility of care services is higher. Despite these differences, age-related public spending in Japan has also been growing rapidly. The general government deficit in Japan has been negative until the late 1990s, as weak economic growth and a concomitant stimulative fiscal stance have led to economic imbalances. Until the recession that began in Finland in 2008, the situation was better, but today Finland's primary balance has also been negative.
7. Population over 65 in Finland and Japan (1960-2018)
Japan's debt development has been affected by the same factors that will be faced in Finland over the next decade. The working-age population is declining, productivity growth prospects are weak and public finances are suffering from a structural deficit. The latter refers to the actual government deficit adjusted by economic theoretical calculations provided by the European Commission. In both countries, future debt developments depend not only on policy measures but also on structural measures and inflation developments.
What can Finland learn from Japan?
As Finland is in the midst of similar problems that Japan has been struggling with for more than a decade, both pitfalls and opportunities can be found in the comparison. As mentioned earlier, slow post-recession economic growth is a global phenomenon, but for countries that are simultaneously facing their own structural changes, it can be fatal. Rapid aging is a drastic change in terms of cost and impact in general: companies do not increase production capacity, household confidence in the future is dissipated and low inflation keeps the real value of debt high. In Japan, under these conditions, a strong resuscitation has not worked.
In Finland, the effects of aging are likely to be smaller, as immigration has sustained the otherwise slowing population growth and offset the declining birth rate. Another factor that improves the situation in Finland is women's participation in work: in Japan, more than a third of women are in part-time employment, so the difference in workload measured in Finland is considerable. The importance of structural measures for Finland's economic policy is emphasized. Decisions on economic reform need to be taken quickly, otherwise growth and jobs may be lost. If anything, we can see from the situation in Japan, that these losses could become large.