As the populations of many countries begin to live longer, healthier lives, the countries eventually reach a tipping point as the population ages: They have to manage a growing share of people that need more care and services while dealing with a shrinking workforce.
Many countries are reaching or approaching this tipping point now. Global life expectancy has risen 54% since 1950, which is why Morgan Stanley Research has identified the longevity conundrum as one of our key themes for 2024. But as countries struggle to manage the wide-ranging ramifications of increased longevity, they may look to Japan for lessons. Longevity in Japan has risen sooner and more than in other nations, and so it has the highest share of population above age 65.
“Japan faces three main challenges: reduce the social costs associated with higher longevity; accelerate productivity; and lessen the impact of a shrinking labor force, which is forecast to decline by about 1% per year until 2050,” says Robert Feldman, Senior Advisor at Morgan Stanley MUFG Securities. "Though its issues with increased longevity are far from solved, Japan has lessons for the rest of the world.”
Social Pressures
Higher longevity means higher social spending, and Japan's pension and healthcare costs are increasing rapidly, up from about 16% of GDP in 1994 to about 27% now.
Japan has a few advantages in terms of its social spending: Its population is generally healthier than the average among advanced economies, which keeps medical costs down and reduces pension spending by allowing the population to work longer and retire later.
Japan has increased the pension age over the last 20 years, albeit slowly, and introduced an automatic adjustment mechanism in 2004 as part of reforms aimed at balancing payouts and revenue. Meanwhile, its nationalized healthcare system gives the government the power to regulate drug prices, and hospital stays have been shortened.
There also is scope to cut social spending further with the use of technology. For example, advances in IT and the growing adoption of generative artificial intelligence (AI) in healthcare could aid in earlier detection, reduce treatment and administrative costs, and improve health outcomes.
Productivity Boost
Getting a handle on social costs is only one part of the equation.
"As longevity costs escalate, faster productivity growth is the key to maintaining living standards and holding down debt costs,” says Feldman.
Ideally, Japan should aim to reduce its ratio of debt to GDP, which is about 250% today, by targeting productivity growth of at least one percentage point higher than the growth in longevity costs. Japan’s productivity growth has averaged 0.1% in the last decade. Meanwhile, the ratio of pension costs to GDP is expected to rise from 10% in 2020 to 10.4% in 2050. The proportion of healthcare costs to economic output should tick down to 7.7% by 2050 from 7.8% in 2020.
"The question for fiscal sustainability is how much spending on the elderly must be constrained, relative to productivity growth," says Feldman.
Japan has several options to speed productivity growth. These include accelerating technology diffusion, improving the efficiency and flexibility of the public and private sectors, and expanding business opportunities in key industries such as energy, AI and IT, agriculture, healthcare and education.
Labor Pains
Japan is unusual among its peers in that labor participation rates are already high for women, while older men and women of all ages are working more and longer. Still, Japan will need adjustments as the population ages. While technology continues to revolutionize the workplace, it generally favors younger workers, who tend to adapt to it faster. As a result, older workers may become less productive and ultimately a drag on the economy, unless they are retrained to transition to jobs with higher productivity.
Reskilling, particularly of older employees, is a key challenge of a longer-lived workforce. The government's reskilling measures so far have targeted about one million people, far short of the 10 million to 11 million jobs the new technologies are expected to create. However, companies may see an opportunity to respond by reskilling or placing older workers in roles requiring creativity or person-to-person interactions that are harder to replace with AI models.
Increasing immigration could be another approach to boosting the labor pool. Japan now has two million foreign workers, and is expected to continue relaxing the rules for highly skilled workers, by offering an easier path to permanent resident status, for example. However, Japan is limited in the number of foreign workers it can absorb, with language barriers, schooling and amenities among the difficulties.
The Investment Opportunity in Longevity
Overall, maintaining dignity and expanding inclusivity and mobility are social trends that are also key to managing longevity.
Demand for longevity-linked products and services is expected to follow longevity’s upward trend. Therefore investors may want to monitor how companies look to address gaps that will be critical to serve the needs of the expanding population of older adults. For instance, low wages and benefits for workers in Japanese care facilities constrain the supply of care. Access for the elderly to transportation for shopping, medical services and independent living will be another challenge and opportunity. Access to financial services for the elderly will present another challenge and opportunity as more and more private and public services shift online.
A byproduct of a successful longevity policy will be a reduced ratio of debt to GDP. For bond investors, lower debt levels are important as a risk indicator for holding Japanese government debt. For equity investors, any increased productivity and earnings potential could bring new business opportunities, especially in AI, technology, agriculture, healthcare and education.
For full insights and analysis, ask your Morgan Stanley Representative or Financial Advisor for the full report, “Longevity: Lessons for the World From Japan,” (Jan. 22, 2024)
