Len puts the finger on the issues. But I think it would be helpful to separate increased longevity, which is a wonderful achievement, and a declining birth rate.

What we lump together as "demographic change" has four
aspects: increased longevity, a lower birth rate, a worsening ratio of dependents to working age population, and overall population decline.

-- Longevity is wonderful, especially if older people enjoy a high quality of life, and per se not a problem except perhaps in terms of health expenditure.

-- A low birth rate is NOT an accident of nature. With the right policies and a change in perception of the role of women in society, even a developed country can come very close to replacement rate, as we have seen in Sweden, Denmark and Quebec (not a country, OK, but with its own policies on maternity leave etc). While these can be seen as costly, they are over the long run probably revenue-neutral because the population stabilizes, and a stable population creates more economic growth than a shrinking one.

-- A worsening ration of working age people to dependents creates a tremendous burden for younger people, unless the assets of older people are heavily taxed and pensions harshly cut. Higher taxes on income would depress growth. The better way would be to raise consumption tax, because old people consume relatively more than they save. But I think that's unlikely to happen in a democratic society in which a majority is either close to retirement or already retired (By the way, I would be very curious to see if there is a difference in support/opposition to a sales tax raise between age groups in Japan).

-- Overall population decline at this rate, as Len points out, logically leads to less investment. In fact, one could argue it leads to permanent overcapacity that needs to be reduced. Interestingly, both Paul Krugman (http://krugman.blogs.nytimes.com/2012/01/09/japan-reco
nsidered-2/) and Shirakawa Masaaki (in a recent talk here at LSE) have pointed out that per working age resident, Japan's GDP has been growing since 2000 and is almost back to where it was in 1990. This suggests that if we don't see growth in aggregate GDP or GDP per capita, it's largely due to demographic changes. All this handwringing over education policies, Samsung and other Korean competition, etc really is distracting from this problem.

By the way, Peter, I find the term "pro-natalist"
somewhat offensive. It suggests that policies that support women who want to combine career and children are driven by a "natalist ideology." Even if you think having children is purely a lifestyle choice, you should consider that many couples in Japan do not have children because they do not have the job stability or even income they feel they need to have them and be responsible parents. Those circumstances are not their choice at all.

Best,

Mark

Dr Mark S MANGER
Lecturer in International Political Economy International Relations Department London School of Economics m.s.manger[at]@lse.ac.uk