In this blog post, we examine the impact of population decline on the economy and society as a whole through the examples of Japan and South Korea. Let’s consider together the repercussions of the impending demographic cliff.
Will the economy collapse if the population shrinks?
As of 2023, people aged 65 and older account for 29.1% of Japan’s total population, the highest rate in the world. The proportion of those aged 80 and older has also reached 10%, signaling a deepening transition into a super-aged society. By 2027, a shortage of blood for transfusions is expected to become a serious issue due to aging and the decline in the younger generation, and by 2033, there is a high probability that approximately one in three homes will stand vacant. Furthermore, by 2040, half of all local governments are expected to face the risk of dissolution, which starkly illustrates the severe population decline and aging problems facing Japanese society.
What do you think? Doesn’t this picture of the future sound bleak just to hear about it? This is a scenario outlined by Japanese journalist Masashi Kawai, summarizing the social problems Japan is expected to face as a result of population decline. Kawai and other Japanese experts warn that if the country’s low birth rate persists, this grim scenario will become a reality.
Low birth rates and an aging population are not just Japan’s problems. The reality facing neighboring South Korea is no less daunting. In fact, South Korea’s low birth rate and aging population issues are already far more severe than Japan’s. A country where the population aged 65 and older exceeds 7% of the total population is called an “aging society.” When it exceeds 14%, it becomes an “aged society,” and when it exceeds 20%, it is called a “super-aged society.” South Korea, which entered an aging society as early as 2000, became an aged society in 2017. The country is aging at a pace unprecedented in the world. It took South Korea seven years less than Japan—a super-aged society—to transition from an aging society to an aged society. Demographers predict that if the current low birthrate trend continues, South Korea will cross the threshold into a super-aged society by 2026, just like Japan.
Problems Caused by Population Decline
The reason people are so deeply concerned about population decline is that it has such a profound impact on every sector of society. A shrinking population means fewer consumers to purchase goods and services. Given that South Korea’s domestic market is already small, if even the existing consumer base shrinks, a wave of corporate bankruptcies is inevitable. Another major problem is that companies will find it increasingly difficult to recruit employees. It will also become harder to recruit personnel essential for maintaining society, such as civil servants, police officers, firefighters, and soldiers working for the central and local governments. Ultimately, problems will erupt across the country. The issues just mentioned are actually unfolding in Japan, which entered a super-aged society ahead of Korea.
So, let’s take a closer look at the shocks that population decline will bring, one by one. When discussing low birth rates and aging, we cannot avoid examining Japan’s case. This is because by closely observing Japan—which shares similar demographic structures, social and cultural contexts, and economic and industrial frameworks with Korea—we can foresee the problems that Korean society will face in the next 10 to 20 years. Recently, the term “regional extinction”—referring to the complete disappearance of local governments in rural and fishing villages due to population decline—has become increasingly common in Korea as well. The term “regional extinction” actually originated in Japan, stemming from a report released in 2014 by a private advisory body. This report, known as the “Masuda Report” after Hiroya Masuda, a visiting professor at the Graduate School of Public Policy at the University of Tokyo, contained a shocking prediction: “If the current birth rate continues, half of Japan’s local governments will be at risk of disappearing by 2040.”
Professor Masuda served as governor of Iwate Prefecture, a local government in northeastern Japan, for 12 years. He also served as Minister of Internal Affairs and Communications—a position equivalent to South Korea’s Minister of the Interior and Safety—overseeing the Japanese government’s local autonomy policies. It was this very figure who released a report warning that 896 local governments—half of Japan’s total—could disappear within the next 26 years. It is no wonder that Japanese society was taken aback. The research team led by Professor Masuda used the number of young women aged 20 to 39 as the basis for calculating which local governments are at high risk of disappearing, rather than the birth rate. They defined “cities at risk of disappearing” as those where the female population aged 20 to 39 is projected to fall to less than half of its 2010 level by 2040. If the population of women of childbearing age itself declines, the number of children born will decrease even if the birth rate rises. Calculations based on this method yielded the shocking result that 896 local governments—half of Japan’s total—could disappear by 2040.
Since the release of the “Masuda Report,” the Japanese government has rolled up its sleeves to prevent the disappearance of local governments caused by low birth rates and population outflow. This is why various policies have been introduced to disperse the population concentrated in the capital, Tokyo, to rural areas. The Japanese government and experts analyzed that population concentration in major cities is one of the causes of the low birthrate phenomenon. When people move from rural areas to major cities, the rural population declines, and the very possibility of population growth diminishes, especially as the young population—who are primarily capable of having children—leaves. Furthermore, since housing and living costs are high in major cities, resulting in lower birth rates compared to other regions, the larger the population residing in these cities, the more severe the low birth rate phenomenon becomes. In fact, Tokyo’s total fertility rate in 2016 was 1.24, which is lower than the national average.
For these reasons, the Japanese government is striving to reduce the population flowing into Tokyo and increase the number of people moving from the metropolitan area to regional areas. In particular, the government is encouraging young people to move to rural areas. To this end, it has introduced a policy offering corporate tax breaks to companies that relocate their headquarters from the Tokyo area to rural regions. This is because when a company moves to a rural area, a significant number of its employees tend to relocate with it. In addition, the government is implementing measures to support local companies and universities in enhancing their competitiveness.
So, what is the situation in Korea? There is a report in Korea that could be called the “Korean version of the Masuda Report.” According to the Korea Employment Information Service’s August 2018 report, “Regional Extinction in Korea 2018,” 89 out of 228 cities, counties, and districts nationwide (39%) were at risk of extinction due to population decline. As of March 2022, the number of areas at risk of disappearance had increased to 113, accounting for approximately 49.6% of all cities, counties, and districts. Compared to the 75 areas identified in 2013, this represents an increase of 38 areas over nine years, demonstrating that the risk of regional extinction is continuously expanding.
This study classified areas as at risk of extinction by dividing the female population aged 20–39 by the population aged 65 and older in each city, county, and district, and identifying those where the ratio did not exceed 0.5—that is, where the number of women aged 20–39 was less than half the elderly population. Looking at the details, as of 2018, Uiseong in North Gyeongsang Province had the highest risk of depopulation among all local governments nationwide. It was followed by Goheung in South Jeolla Province, Gunwi in North Gyeongsang Province, Hapcheon in South Gyeongsang Province, and Namhae in South Gyeongsang Province. Even local governments located within major cities were not immune to this risk. In Busan, Jung-gu, Dong-gu, and Yeongdo-gu were classified as areas at risk of depopulation. Gyeongju City was also identified as a local government at risk of disappearing. Research Fellow Lee Sang-ho explained in a media interview, “Recently, areas at risk of disappearing have been spreading to provincial capitals, industrial cities, and even metropolitan areas. The crisis in local manufacturing has accelerated population outflow.” The analysis that local governments may disappear not only in rural and fishing villages but also in urban areas as the population shrinks clearly illustrates the severity of the population decline issue. If local governments begin to shut down due to population decline, it will inevitably cause significant disruption not only to the affected regions but also to the political and administrative systems of the entire nation.
So, how will population decline affect the economy and industry? As mentioned earlier, South Korea entered an aging society in 2017. However, another significant phenomenon observed in 2017 was that South Korea’s working-age population declined for the first time in history. The working-age population refers to those aged 15 to 64. This term denotes the “population capable of working and engaging in economic activities.” A decline in the working-age population means there are fewer people available to work. According to Statistics Korea, the working-age population rose slightly to 37,116,000 in 2022 compared to 2021, but it fell again in 2023 to 36,936,000.
One might ask, “Isn’t it a good thing that the unemployment rate is falling when the number of people able to work is decreasing, especially during a severe job market crisis like the one we’re facing now?” However, this is not the case. While the unemployment rate may decrease in the short term, the negative impact on the economy is far greater in the medium to long term. Let’s look again at the case of Japan. According to data released by Japan’s Ministry of Internal Affairs and Communications, Japan’s unemployment rate stood at 2.5% on a seasonally adjusted basis as of November 2024, indicating a stable labor market. Although it dipped slightly to 2.4% in September 2024, the overall unemployment rate for 2024 showed a trend of maintaining stable employment conditions in the Japanese economy. An unemployment rate in the 2% range is considered so low that economists refer to it as a “state of full employment.” This means that, excluding those taking a brief break to look for a new job, everyone who wants to work can find a job.
Japan’s unemployment rate began to fall below South Korea’s in November 2014. There are several reasons for this improvement in the employment situation. First, the economy revived thanks to the “Abenomics” strategy implemented by the Japanese government under Prime Minister Shinzo Abe. Additionally, the shrinking youth population has led to a situation where the number of job openings exceeds the number of job seekers, which is cited as another key factor. The ratio of job openings to the number of people seeking employment is called the “effective job-to-applicant ratio.” This statistic shows how many job openings there are per job seeker; in November 2024, the effective job-to-applicant ratio stood at 1.25.
While this abundance of jobs is ideal for job seekers, it means that companies face significant challenges in recruiting staff. Small businesses and SMEs are particularly hard hit. When job seekers have the luxury of choosing where to work, demand naturally shifts toward large, stable conglomerates and mid-sized companies. Tokyo Shoko Research has been compiling annual data on the number of companies that have gone bankrupt due to labor shortages since 2013. According to this data, approximately 300 companies close their doors each year due to a lack of workers. While large and mid-sized companies can solve the labor shortage problem by automating existing tasks using machines or software, micro-enterprises and SMEs that lack the capital to invest in automation equipment cannot resolve the issue in this way. Japan’s working-age population has been declining steadily since 1994, when it accounted for 64.95% of the total population. As of April 2024, the working-age population stood at 73,952,000, representing 59.5% of the total population—the lowest level on record.
There are projections that by 2030, the labor shortage in Japan’s industrial sector will exceed 6.4 million people. According to a joint study by the Tokyo Pasol Research Institute and Chuo University, the labor shortage is expected to increase fivefold by 2030 compared to 2017. So, how will the population decline resulting from low birth rates directly affect the South Korean economy? Among OECD member countries, South Korea is the only one with an ultra-low total fertility rate of 1.0 or below. While Japan’s population decline has been described as severe, South Korea may soon find itself in a situation that even Japan would envy.
In October 2018, the National Assembly Budget Office of South Korea released a report titled “Causes and Economic Impacts of South Korea’s Low Birth Rate.” This report projects the economic impact over the next 40 years, through 2060, if Korea’s total fertility rate remains at current levels. According to the report, if the fertility rate continues to hover at 1.05—the same as in 2017—projected GDP in 2030 will be 0.4% lower than the Statistics Korea baseline scenario. By 2060, the projected GDP decline would be 5% greater than in the baseline scenario. The report also predicts that if the fertility rate does not improve, national debt will increase by 7.8% more than in the baseline scenario by 2060. Furthermore, it noted that if the adverse effects of the declining fertility rate—namely, a decrease in the working-age population 20 years from now—continue to accumulate, the rate of GDP decline will eventually exceed the rate of population decline.
As the working-age population gradually shrinks, the elderly population that families and society must support is rapidly increasing, inevitably weighing down the economy. The statistic representing the number of people aged 65 and older that 100 working-age people must support is called the “old-age dependency ratio,” which stood at 19.6 in 2018. This means that 100 people of working age must care for 19.6 elderly people, which works out to roughly five people caring for one. However, according to new data released by Statistics Korea, the old-age dependency ratio is projected to rise to 82.6 by 2060. This implies that in the future, five people of working age (aged 15–64) will have to support four elderly people. As the number of elderly people increases, so will the costs of pensions, healthcare, and long-term care, and this burden will ultimately fall squarely on the younger generation engaged in economic activity. If the costs required to maintain the social security system exceed manageable levels, the vitality of both the economy and society will decline.
So far, we have discussed the negative impact that population decline will have on the economy. However, some experts are countering this by arguing that “population is not the determining factor of economic growth.” A prime example is Hiroshi Yoshikawa, a professor at Ritsumeikan University. He is a leading Japanese macroeconomist who has served as president of the Japanese Economic Association and as an economic advisor to former Prime Minister Junichiro Koizumi. In his book ‘Will the Economy Collapse if the Population Declines?’, he explains that the economy can still grow sufficiently even as the population shrinks. He argues that fluctuations in GDP are not determined by population growth rates. For example, during the period of rapid economic growth in Japan from 1955 to 1970, the average annual growth rate of real GDP reached 9.6%, while the average annual growth rate of the working-age population was only 1.3%. Furthermore, from 1974—immediately following the oil crisis—until 1990, when the bubble economy ended, Japan’s average annual real GDP growth rate was 4.6%, yet the working-age population grew by only 1.2% annually during this period. While the economic growth rates during these two periods differed by more than a factor of two, the rate of growth in the working-age population showed little variation. In fact, an analysis of the relationship between economic growth rates and population growth rates from the early Meiji era in 1868 to the present day reveals little correlation.
Professor Hiroshi Yoshikawa argues that what matters is not the size of the working-age population, but rather how many goods and services a single worker can produce in the same amount of time—in other words, how much labor productivity has improved. Consequently, technological innovation and capital investment are the true driving forces behind economic growth. The argument is that even if the working-age population itself shrinks, it is acceptable as long as workers’ labor productivity is boosted. For example, suppose that in the past, 100 workers at an automobile factory could produce only 10 cars in a day, but later, thanks to the automation of production facilities, 10 workers can now produce 50 cars in a day. In this case, the workforce has shrunk to one-tenth of its original size, but car production has increased fivefold. In terms of labor productivity alone, it has increased 50-fold. Moreover, thanks to technological advancements, the cars produced today are of higher quality than those made in the past. Since higher quality typically means higher prices, labor productivity has effectively increased even further.
The Silent Approach of the Population Cliff
Professor Hiroshi Yoshikawa’s argument resonated deeply with the Japanese public, who had been steeped in a sense of defeatism, believing that “economic stagnation due to population decline is inevitable.” However, the counterarguments are no less compelling. While it is theoretically possible to maintain economic growth even with a shrinking population by boosting labor productivity, the reality is different. This is because it is not as easy as it sounds to boost labor productivity fast enough to offset the impact of a rapidly shrinking population in the short term. In a situation where the working-age population is shrinking, leading to a slump in national consumption, a contraction of the economy and industry, and even a decline in government tax revenue, advocating solely for technological innovation may be unrealistic optimism.
Even if technological innovation succeeds at a truly “innovative level” and maintains GDP growth, that alone cannot fully offset the various social problems caused by population decline. It cannot solve all the problems unfolding across society, such as the inability to provide administrative services to residents due to labor shortages, difficulties in maintaining public order, weakened national defense due to an insufficient number of soldiers, and the inability to properly respond to major disasters. This counterargument comes from journalist Masashi Kawai, whose book *The Future Timeline*—analyzing the adverse effects of population decline across all sectors of society—became a major sensation, ranking as a bestseller on Amazon Japan for 34 consecutive weeks.
Returning to the main point, South Korea has also undergone a major transformation as it entered an aging society while simultaneously experiencing a decline in its working-age population. However, the lives of Koreans have not changed significantly overnight. This is due to the nature of demographic shifts, where the impact of change is felt slowly over a very long period. Yet, by the time Koreans begin to notice this impact in their daily lives, it will already be too late to reverse the trend no matter what measures are taken. I hope this blog post serves as an opportunity to reflect on the demographic cliff that will hit us in the not-too-distant future.
