Forecast After 2020

Japan will enter the 2020s in a relatively strong position. Despite growing opposition from an electorate dominated by older voters, the government will be more successful than previous administrations in implementing reform. Breaking up the agricultural and other lobbies in the late 2010s will expedite the process. As the generation born before World War II leaves politics and tensions with China grow, nationalist sentiments in Japan will surge, allowing the government to more actively mobilize support for defense reforms.

The reform measures initiated under Abenomics will slowly come into force after 2020 but will fall short of generating sustained annual GDP growth above 1-2 percent. Demographics will undergird this poor performance: Between 2015 and 2020, Japan's workforce will shrink by 3.3 million, or about 4 percent, increasing the pressure on the economy's productive capacity. Reform measures, however, will help ensure relatively stable GDP, improved efficiency and productivity as well as constant quality of life. This will provide a workable basis for the government's efforts to revamp the country's regional and global image and extend its political, military and economic reach.

From 2020 to 2030, Japan's working-age population (ages 20-64) will fall by around 4.8 million to 5.6 million. This drop will be well below the decline of 7.7 million-8.3 million people from 2010 to 2020, but it will be substantial nonetheless. To maintain a constant GDP, Japan will need to ensure average annual productivity growth of at least 2 percent. Doing so will require securing labor reforms. It will also depend on the Japanese government's ability to stimulate higher value-added services (such as financial services) and computer technologies industries at home.

Fixing employment problems will be critical for supporting Japan's growing elderly population. Compared with the years between 2010 and 2020, when the country's over-65 population grew by 7.5 million, the rate of population aging will slow considerably in the 2020s. Still, the absolute burden of caring for Japan's elderly population will only grow. By 2030, people over 65 will account for 32 percent of Japan's population, as opposed to 56 percent of the population at working age.

Tokyo will make tangible progress throughout the 2020s in cementing reforms and encouraging the kinds of industries needed to improve the overall productivity of Japan's economy. But the Chinese and European economies will remain weak through the early 2020s, and Japan's internal changes are unlikely to generate enough taxable income to reverse Tokyo’s reliance on deficit spending. Japan probably will not default on its debt, given the high rate of domestic ownership, but the amount of debt will grow, as will debt servicing costs.

Japan's relations with China will be in flux between 2020 and 2030. Even as China's economy slows between 2015 and 2018 and the Chinese government struggles with rising unemployment and social dislocation at home, the United States, Japan and their partners in broader Asia will pull closer together to balance against the perceived Chinese threat.

Beijing will continue to invest in its military and maritime expansion, and the world will continue to expect an imminent Chinese economic recovery. This will fuel integration efforts by the United States and Japan. But before 2025, the limits to China's economic trajectory and military capabilities compared with those of the U.S.- and Japan-led coalition will have become unmistakably clear. This will coincide with the unleashing of long-suppressed social and political energies within China, a process that could reach a climax before the scheduled 2022 generational leadership transition. The extreme centralization of political power before 2020 will have thoroughly undermined the system of checks and balances within the Communist Party of China and will make for a tumultuous transition process.

Up to 2025, Japan's neighbors will continue to view it as the leading counterbalance to China. Before long, however, internal political turmoil and continued economic dislocation within China will start to put the brakes on this dynamic. Stratfor expects China's ongoing economic slowdown to bottom out sometime around 2020. Throughout the early 2020s, China will be engaged in a process of restructuring and rebuilding its economy, a process that will weigh on annual GDP growth through the late 2020s. It will not be until the end of the decade that China's painful restructuring comes to fruition and domestic consumption by the urban middle class emerges as a genuine driver of national economic growth. As a result, China will exist in a state of economic dysfunction between the leadership transition of 2022 and perhaps as late as 2029-2030, likely increasing regional economic fragmentation.

The United States will realize the state China is in and will begin to slowly adjust the U.S. position in the region. Washington will move to prevent a complete Chinese political and economic collapse, fearing that such an outcome would cause extraordinary disruption across East Asia and provide an ascendant Japan a chance to move beyond the United States. To prevent its displacement, the United States will move to constrain Japan while avoiding open displays of friction with the Japanese.

Thus, Japan will find itself in the second half of the 2020s caught between a recovering China and a United States more amenable to assist in that recovery. This strategic bind, combined with Japan's deepening demographic decline, could well pave the way for another period of relative introversion in the 2030s.

The rates of workforce decline and population aging will both remain moderate in the 2030s before picking up precipitously in the 2040s. Efforts to boost fertility rates in the late 2010s and 2020s may help counteract the effects of working-age and population decline after 2040, but by and large, their effects on Japan's workforce will not be felt in the 2030s. If fertility does improve, Japan's workforce (by 2040, only 52 percent of the population) could find itself even more financially strained than in the previous decade. By 2060, Japan's workforce will have declined by 50 percent since 2015, while the country's total population could fall by as much as 25 percent. With this in mind, the years after 2040 are likely to be increasingly dominated by internal economic and social management-related issues.

Date: 2016-04-22; view: 734