I have spent the last three weeks in the land of the rising sun – Japan.    I have not written about it because it has taken me a long time to figure out what is happening here.  I expected to find a country beset with the problems of aging (Japan is further than any other rich country in the aging of its population), a 20-year economic spell of little or no economic growth, and anxiety about the rising power to its west, China.

Yet what I found was a country that was, to all appearances, richer, more comfortable, more cosmopolitan, and happier than I observed during my last visit eight years ago.

Japan still has a lot of those whiz-bang gadgets that make you say “Why can’t we do that?”  Some of these are old stand-bys (heated, automatic ventilating and cleaning toilet seats; taxis whose doors open for passengers by driver’s remote control), others I hadn’t seen before (traffic lights with timing indicators that tell you how much longer they will stay red or green, ATM and change machines that let you specify denominations and change).  There is still a powerful obsession with quality (almost any kind of food – Japanese, Chinese, French, Italian – is as good or better than you can find anywhere in the world).  And the countryside remains gorgeous; Japan is not only the land of hyper-lit city towers, it is a land of brilliantly green forested mountains flowing with waterfalls and stunning lakes and hot springs.

The bullet trains and subways still run right on the dot on schedule, streets are remarkably safe, and everyone is unfailingly kind and polite, and hard-working.   About half of young Japanese women, it seems, now color their hair an attractive auburn, and their fashion sense would horrify Islamic conservatives, but seems very 1960s American – the higher their heels, and the shorter their skirts, the better – or so it seems from the hip crowds at Shibuya.  The young people are noticeably taller than a few decades ago (many are very tall indeed), and the uniform conservative dress of the ‘salarymen’ has been replaced by a more relaxed and individual style of dress – what we would call ‘smart business casual.’   French patisseries and cafes can be found in almost every neighborhood in Tokyo alongside the ubiquitous noodle shops, and they and the shops are thronged with customers.

So how is all this possible when in America, which is supposed to be doing much better demographically and economically, we are so economically strained and distraught?   In fact, when you look carefully around in Tokyo, it is evident that there are a lot of old people, and hardly any small children (riding the subways I could usually count on one hand the number of under-5 kids I would see out with parents on any given day).

The answer is that Japan is still benefitting from its demographic changes.  I went back and looked at the data.   Japan’s relatively extreme aging is caused by two factors.  First is remarkable longevity.  It would be too much to say that Japanese have stopped dying, but they certainly have stopped dying in the 50s and 60s, due to relatively low rates of heart disease for a developed nation (lots of fish oil, not much red meat in the diet).   Life expectancy is the longest in the world, in the low 80s and still rising.  The large generation born after WWII, from 1945-1960 is now just aged 50-67.   They are mainly very healthy and almost all still working.   Thanks to Japan’s seniority pay scale, they are also almost all earning more than ever – and since Japan has had decades of gentle deflation, their real incomes have grown.   They continue to funnel a lot of what they earn into savings accounts in Japan, giving the government and industry access to plentiful domestic capital, keeping interest rates at rock-bottom levels.   The number of 70 and 80 years olds has so far increased only slightly, and the Japanese government has been able to cover their health care and pensions without raising taxes by simply borrowing to cover the costs.  This has driven Japan’s government debt to by far the highest levels in the world, at over 200% of GNP.   This is far more than struggling European states such as Greece, Ireland, and Italy.  But it has not been a problem because Japan enjoys such low interest rates (under 1%) that the annual interest bill remains a small 2% of GDP, the debt is mainly in yen, and Japanese businesses and banks enjoy a strong stream of investment income from overseas that outweighs their debt costs at home.

The other factor driving increased average age in Japan is a sharp fall in birth rates, which came earlier and sharper than in most other rich nations.  Starting in the 1970s, fertility declined fast.  At first, because of the large size of the post WWII cohort and the large number of young women it produced, the decline in fertility didn’t produce a rapid overall decline in births.  However, when the smaller cohorts of the 1970s and 1980s also had very low fertility, the number of births started to plummet.  By the 1990s, the number of children being born had dropped substantially, leaving a much reduced number of 20 year olds today.  But economically, that too is good today.  Parents have fewer children to support, so can spend more on other things.  The kids themselves are more generously supported and can spend more.  The very large number of single children can expect to inherit their parents homes and more, so they are not anxious to save or worry; they are free spenders and in no hurry to start families of their own.  So there is a comfortable cohort of free-spending teens and 20s, obviously enjoying life.

Although there has been little economic growth for 20 years, the population has declined slightly and deflation has lowered prices, so real per capita income has grown as much or more than in the U.S.  Unemployment remains extremely low compared to the U.S. or European countries.   Inequality has increased slightly, but nothing like it has in the US, where the middle class has lost wealth and faced debilitating increases in college and health care costs. So why shouldn’t Japan be a very happy place?

Sadly, this picture is like a sunset – a beautiful burst of color before the darkness when it sets.  However nice things look now, Japan is on the cusp of a crisis – and if you scratch beneath the surface, people here, especially young people, know it.  In the next fifteen years, the population of Japan aged 70 and up will suddenly jump by 40%, from 20 to 28 million.  At the same time, the number of those aged 30-45 will drop by about the same amount, from 27 to 20 million.   This sudden flip will put enormous strains on the amount younger tax payers will have to pay to provide for the health and wealth of the booming number of seniors.  The ratio of Japanese aged 15-64 to those 65 and older was still a healthy 4 to 1 in 2000.  But it dropped to 3.3 to 1 in 2005, and 2.8 to 1 in 2010; by 2020 it will have dropped all the way down to 2 to 1, or half what is was in 2000.  So while Japan has not yet felt the brunt of its aging, it is about to feel it hit like a sledgehammer in the next 10-15 years.   During that time, if seniors start withdrawing savings rather than contribute, driving interest rates up, the fiscal strains on the government will rise sharply as well.

Just this week, Japan passed a very controversial and unpopular doubling of the national sales tax, from 5% to 10%, for the explicit purpose of reducing state debts and financing the impending increase in pension costs.  The ruling party is also under attack for promising pension benefits that are probably unrealistic given projections for costs and revenues.

Young people are rapidly getting discouraged.  They see that one-third of college graduates are getting only part-time jobs; that there are few new job openings in government or education (the number of students in all levels of schooling is dropping rapidly); and that Japanese businesses are struggling against Korean competition and facing stagnant growth in their main export markets in Europe and the U.S.   Large numbers of them have fallen into a life attached to video gaming and living at home, rather than building their own families – which feeds into the cycle of having children later and fewer if at all.

In my lectures here, I have stressed that Japan has great opportunities as well as challenges.  If Japan can use its whiz-bang technology to develop ways to keep seniors happy and productive, those technologies will have a booming export market, for the number of people 60+ will be the world’s fastest growing market in the coming decades.  Japan also needs to pioneer ever more effective ways to generate and use energy with less dependence on fossil fuels (which it depends on importing), and to develop products that will find mass markets in faster growing emerging economies in Latin America and Africa.  Japan’s technology for dramatic urban design and efficient urban and regional transportation should also find demand throughout the rapidly urbanizing developing world.  Japan has of course seen and benefited from rapid growth in China, supplying capital goods and technology to support China’s boom, and Japan has also increased its economic ties to southeast Asia.  But it remains largely insular to East and southeast Asia, having little presence in India and Africa.  Presented with evidence for the coming economic slowdown in China, the Japanese are coming to realize they need to look further abroad to find new regions for growth.

I leave Japan still impressed with the skill and kindness of the Japanese, and the great quality of their life and products.  But I worry for them too.  Will the younger generation focus on stagnation in Japan and lose their ambition?  Or will they envisage a new global role for Japanese companies and Japan itself?  How will they finance and manage the aging of their population?  Will they open up to more immigration?  Will they be as successful in South Asian and African markets as they have been in Europe, China, and the U.S.?   It will require a substantial shift in Japan’s world view, and its traditional insularity, to succeed in the coming world.  I would like to see them succeed, as we would all gain thereby.