Is a Shrinking Population a Good Thing for Japan?
An intriguingly contrarian take on Japan's declining population is attracting much attention. In a recent article in Bloomberg, columnist William Pesek discusses a report from Sharmila Whelan of CLSA Asia-Pacific Markets. Pesek writes:

Whelan's optimism is based in part on history. Growth, she argued, tends to be driven by "specialization, innovation and trade.'' Investment, like labor,tends to go where returns are highest. As Japan moves more toward a knowledge-based economy driven by increased research and development, its citizens will prosper...Similar demographic trends didn't hold back Venice's economy in the 11th century, Whelan said. Nor did they imperil the Dutch Republic in the 14th century. Likewise, Whelan said, ``in the coming decade, Japan's shrinking population is the least of her problems as far as growth goes.''...Whelan also makes the argument that "Access to labor, technology and capital are the least of Japan's problems...creating an environment where there is unhindered entry and exit of new businesses and new ideas are born resulting in continuous innovation and cost savings is the greater challenge. Japan has a long way to go, but the process has started."

According to Pesek, Whelan cites "renewed foreign interest in Japan, a rise in mergers and acquisitions, and a growing number of start-up companies" as evidence that the forces of creative destruction are at work, and a more productive and dynamic corporate sector is in the offing.

Perhaps demographics isn't destiny, but I question just how much Japan is changing. The rise in mergers and acquisitions is notable. But the outcome of some M&A battles -- like the fight for Hokuetsu Paper where Oji Paper's hostile bid was set aside by company management -- is hardly encouraging for the forces of creative destruction. A few stories in the business press about Japan's new entrepreneurial class makes encouraging reading. But most of Japan's under-35 cohort still seems mired in the the worlds of salaryman/OL or arbaito/freelancer, neither of which are places from which ground-breaking economic change is likely to originate.

Further, even if Japan's population was only aging rather than shrinking, that would still augur poorly for the nation. Generally speaking, an older population is more conservative, needs to focus greatly on health needs, and consumes rather than innovates. Whelan may hope that the younger population that displaces it in government ministries will set the nation on a new course. But if the political environment is such that it favors the old over the young, those efforts are likely to be fruitless. With a greater number of older voters who are more reliable voters, a new generation of politicians may well be hamstrung if they try to effect change in traditional Japanese institutions too rapidly.

Still, it's encouraging to get a more optimistic view of Japan's prospects, and Whelan's contrarian view (if indeed it is as advertised -- we haven't seen her original report) is certainly to be welcomed, as it adds fresh energy to the discussion of Japan's future.