COMMENTS ON DEMOGRAPHICS VERSUS DEBT BY PROF. GOODHART AND PRADHAN Masaaki Shirakawa Aoyama Gakuin University 15th BIS Annual Conference Long-term issues for central banks June 24, 2016 Lucerne, Switzerland
2 Outline of my talk 1. Observation of the debate on demographics in the context of macro-economy and monetary policy in light of Japanese experience 2. Comments on remarks by Prof. Charles Goodhart and Prof. Manoj Pradhan
#1. It takes long to fully recognize the impacts of demographics. The issue is still underappreciated Academics and policy makers globally have come to recognize the importance of this issue, albeit belatedly, but its importance is still grossly underappreciated. Delayed recognition is understandable based on my own experience. I have to confess that I was not so prescient, although I have been emphasizing the importance of demographics in recent years. At the height of bubble economy in Japan (late 1980s), some already expressed cautionary view of the impact of future rapid ageing. I was dismissive of such view. In 1990s when Japan was muddling through bubble bursting and associated financial crisis, I was of the view that once deleveraging is completed, the economy will return to previous growth path. I was unaware of the significant impacts of demographics. 3
Japanese economy in the past 15 years vividly shows the importance of demographics 4 GDP per working-age population GDP United States United Kingdom Japan Euro area Germany France CY2000=100 135 130 125 120 United States United Kingdom Japan Euro area Germany France CY2000=100 135 130 125 120 115 115 110 110 105 105 100 100 2000 02 04 06 08 10 12 14 15 Sources: OECD; Eurostat. 95 95 2000 02 04 06 08 10 12 14 15
Working-age population in Japan is now decreasing by one million every year (1% p.a.) 5 (% chg.) 1.0 (Difference, 1,000 people) 2,500 0.5 2,000 0.0 Population Working Age 1,500 1,000 Population -0.5 500 Working Age 0-1.0-500 -1.5-1,000 1990 1995 2000 2005 2010 1990 1995 2000 2005 2010
# 2. Demographics is affecting AE through purported lessons of Japanese experience as well Experience of Japanese economy has been intensively studied by economists and policy makers abroad. Key words were lost decades, deflation, etc. Monetary policy activism on a global scale was partly due to the interpretation of Japanese experience. But, different lessons would have been drawn, if demographic change were properly recognized. (Intellectual channel. ) 6
7 Two current global issues bearing on demographics Growth prospect of global economy Demographics is not a sole explanation for secular stagnation but surely one of crucial factors. Speed of ageing going forward in China and Korea will be much faster than in Japan in the past. The US is no exception. Monetary policy response under declining or negative natural rate of interest rate In case that shock hitting the economy is temporal, lowering real market interest rate below natural rate of interest rate is effective strategy. It is like bridging the gap between winter and spring. But in case potential growth rate and natural interest rate are declining permanently, lowering market real market interest rate is like bridging with the ice age.
8 Fertility Rate Rapid ageing in Asia 5 years average Japan China Korea India Thailand 7 6 5 4 Working-Age Population Ratio % U.N. projections 75 70 65 3 60 1950 60 70-55 -65-75 Source: United Nations. 80-85 90-95 2000-05 2 1 0 10-15 Japan China Korea India Thailand 1950 60 70 80 90 2000 10 20 30 40 50 55 50
4.0 3.5 3.0 The impact of ageing in emigrant countries on the US demographics Y/Y change in working-age population: Mexico 3.0 2.5 Y/Y change of working-age population in top 10 countries in terms of US immigrant 9 2.5 2.0 2.0 1.5 1.5 1.0 1.0 0.5 0.5 0.0 0.0 1970 75 80 85 90 95 2000 05 10 15 20 25 30 35 40 Source: Ryutaro Kono (BNP Pariba) -0.5 1970 75 80 85 90 95 2000 05 10 15 20 25 30 35 40
10 Outline of my talk 1. Observation of the debate on demographics in the context of macro-economy and monetary policy in light of Japanese experience 2. Comments on remarks by Prof. Charles Goodhart and Prof. Manoj Pradhan
11 Understanding the implications of reversal of demographic trend is really important Effects of positive labour supply shock Shift of moveable production, notably manufacturing, to Asia, especially to China Collapse of power of private sector trade unions Stagnation of real wages More inequality within countries, less between countries Weakness of demand, deflationary pressures and saving glut Trend decrease in (nominal and real) interest rates. Increasing public sector deficits Demographic trends now reversing Slower growth Need to shift resources to succour old, so high taxes on workers Rebalancing of powers between workers and capitalist/managers More inflationary pressures Higher interest rates
My overall reaction to and specific comments on remarks by Prof. Goodhart and Pradhan My overall reaction I like the spirit of their analysis. Highlighting quite important issue of reversal trend of demographics Truly global perspective Debt is a central issue, when it comes to demographic change My value-added and possible contribution Japan as a forerunner of reversal trend of demographic change Specific comments 1. Stage of demographic change 2. Impact on interest rates 3. Debt dynamics 4. Transition to steady state with fewer population 12
#1: Demographic trends now reversing is too general. We have to be explicit about stage. Classification of stage by G & P is driven by global landscape and useful guide as a big picture. In Japan, more than 20 years have passed, since demographic trend has reversed. Even during this period, its impact was different depending on its stage. We have to be more explicit about the stage of this reversal trend in order to draw meaningful implications. 13 The case of Japan Growth of working age population Peak year is mid 1960s Dependency ratio Bottom is 1989-1993
Not distinguishing the stage is often a source of confusion about the debate on demographics The impacts of ageing on growth First stage: Anticipation of ageing in future An expected decline in future demand depresses current expenditure relative to current productive capacity GDP growth rate tends to decline. Second stage: Transition toward a new steady state with fewer population Actual decline in productive capacity due to decrease in working-age population kicks in. Subsequently, effective working-age population further declines, because very aged people needs growing number of caring and nursing people. GDP growth rate tends to decline further. Third stage: New steady state with fewer population? 14
The effect of ageing on inflation rate is also different depending on its stage If central bank is able to know the change in natural rate in a real-time, demographics is neutral in theory. But assuming that central bank has such a long time horizon and perfect knowledge does not fit well with our actual experience of slow recognition of demographic change. First stage: Deflationary pressure Expectation of a decline in future demand precedes actual decline in productive capacity Second stage: Inflationary pressure Actual decline in productive capacity due to decrease in workforce create inflationary pressure. Third stage: Neutral as long as fiscal sustainability is maintained. If this condition is not met, either high inflation or financial system instability is unavoidable. 15
16 Japan is now entering the second stage of ageing Labor market in Japan is now tightening mainly due to rapid decline in working-age population s.a., % 6 5 4 Unemployment rate Structural unemployment rate 2001 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 3 2
Employment is almost flat in the past 15 years but total working hour is on a decreasing trend 17 CY1985=100 120 115 110 105 100 95 Working age population Number of employed persons Total working hour 1985 90 95 2000 05 10 15 90 85 80 Sources: Ministry of Internal Affairs and Communications; Cabinet Office; Ministry of Health, Labour and Welfare.
18 More participation of aged people and female with fewer hours of work Year 2005-2010 Year 2010-2015 Change in unemployment rate (% point) 0.7-1.7 Change in participation rate (% point) -0.8 0 Change in working-age population (thousands) -2,867-4,654 Change in employed persons (thousands) -580 780 Aged people (thousands) 750 1,600 Female (thousands) 230 980 Change in total working hour (million hours) -355-17 Change in working hour per employed person (hours/month) -4.3-2.1 Note: The aged people are people who are 65 years old and over.
Aged people participate in labor market but they naturally prefer part-time job 19 s.a., CY2000=100 102 100 98 96 94 Total working hour Number of employed persons Working hour per employed person 2000 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 92 90 Sources: Cabinet Office; Ministry of Health, Labour and Welfare.
Inflation rate will eventually increase due to ageing-induced tightening in labor market Total cash earnings y/y % chg. 3.0 20 Scheduled cash earnings by type of employment y/y % chg. 3.0 Total cash earnings Scheduled cash earnings 2.0 1.0 2.0 1.0 0.0 0.0-1.0-1.0-2.0-3.0-4.0 Monthly scheduled cash earnings (full-time employees) Hourly scheduled cash earnings (part-time employees) -2.0-3.0-4.0 2000 02 04 06 08 10 12 14 15-5.0-5.0 2000 02 04 06 08 10 12 14 15 Note: Figures are based on Monthly Labour Survey. Source: Ministry of Health, Labour and Welfare.
21 #2: Higher interest rates? Prof. Goodhart and Pradhan predict higher interest rates. Based on Japanese experiences, the impact of ageing on investment/saving gap seems to be not so clear, at least, compared with its impact on growth rate. Savings decreases. But, investment also decreases, since return on investment decreases due to less labor intensity.
#3: The impact of demographic reversal on debt is complicated Knowing a decline in potential growth rate due to demographic reversal in a real time is not easy. Low growth and low inflation in the first stage of ageing might create too much debt both private and public--, if they lead to prolonged monetary easing. Purported lessons of Japanese experience might be affecting thinking of policy makers as well. 22
23 Higher inflation rate in the second stage due to wage increase does not solve public debt burden Inflation in itself does not change the deficit on primary fiscal balance related to ageing. Potential growth rate gradually declines. Tyranny of silver democracy
24 #4: My lingering question--what is the third stage i.e. new steady state with fewer population? I wonder whether prediction of the second stage is really complete without having a clear picture of ensuing stage of steady state with fewer population. Countries with fertility rate far below replacement level means that population continue to decline. Are such countries sustainable in the very long run? How a country can reach new steady state? What is new steady state like?
25 Deep uncertainties More labor participation: one-time effect, not permanent solution Reversal of fertility rate: we do not know how. Massive immigrants: politically and socially difficult as is shown in recent refugee crisis and political/social divide in many countries. Dramatic increase in productivity In any event, we do not have one-size-fits-all solution for demographic change. Solution might be different in each country. Labor market practice The role of family Immigration Neighboring countries