Working population declines by 4 million in five years

Depopulation in Japan often seems like old news, but the rate of acceleration and its effects are only now beginning to be fully understood. Already medium sized cities in the outer regions, especially in the north, are being hit by population decline so rapid that there’s no longer enough money to sustain even some basic services, and it is about to get worse. By 2040 the number of child bearing women in nearly half the 1,800 municipalities in Japan will halve. For overseas firms working in Japan it’s increasingly important to understand not only where the problem areas will be, but equally where opportunities will arise in a small number of growing municipalities.

The severity of Japan’s long term population decline is becoming clearer thanks to ever more striking evidence. Tokyo, Osaka and a few other places will continue to grow marginally thanks to an influx of new residents escaping the decimated regions, but the spiralling depopulation elsewhere will mean removal of local services and withering markets. This whole phenomenon is the subject of JapanConsuming’s latest report, Japan’s Top 100 Consumer Markets.

Japan’s population peaked at 127.04 million in 2008 and has dropped by 1.08 million in the past five years alone. This seemingly minor change is not the problem, at least for now. Much more significant is the fall of 3.87 million in people aged 15-64, the working age group, close to 1% of the total. In other words, the working population has fallen by the equivalent of the population of Yokohama, Japan’s second largest city, in just five years. Along with a corresponding 4.18 million increase in the number aged 65 or older, the burden on remaining workers is growing rapidly.

One of the most striking changes is that, by 2040, the number of women aged 20-39 will halve in 896 of the 1,800 or so municipalities across Japan, making these areas almost barren. Birthrates overall are reportedly lower in countries such as Taiwan and Italy, but Japan, which already has close to a quarter of its population at or above retirement age, is expected to drop to even lower levels over the next 20 years. Nobody is willing to come out and say it, but the decline is almost certainly irreversible already.

In April, the government introduced new funding and initiatives to support cities that had lost 20% or more of their population. Hakodate in Hokkaido was the first city to receive this support, with its population falling from 340,000 in 1985 to just 270,000 today, and forecast to fall to 170,000 by 2040. Hakodate and cities like it are also experiencing a hollowing out, with city centres unable to survive given the fall in customer numbers, coupled with the now ubiquitous access to shopping malls just a short car ride away in suburbs or neighbouring locations. While Aeon’s efforts to open new SCs in city centres will help in some cities, even these new developments will simply draw custom away from a wide area nearby (see Page ??).

Hakodate likely represents how other cities will fair in the next 20 years. As noted in JC’s Top 100 Markets report, it is Hokkaido’s third largest city, but its fishing and tourism-based economy is shrinking along with the population. It is expected to have one of the biggest contractions in population over the next 20 years, exacerbated by having the second highest proportion of over 65s in the country. Already the lack of working population has meant a rapid drop off in local taxes, and city infrastructure, even to the point of the water supply, has been hit by lack of investment. Some 30% of the water supplied to Hakodate is currently being lost through leakages, forcing the local water authority to request a 35% rate increase to pay for repairs. Faced with a beleaguered electorate, the city government only approved an increase of half that, but even then a 17% increase in water rates is a good example of how rising costs will have an impact on consumption. In other words, depopulation does not just mean fewer consumers, it also means a rising per capita burden of public services which will reduce capacity to consumer on non-essential items further.

Needless to say but consumer goods companies and retailers are unlikely to hang around as the rot sets in, exacerbating the decline even further.  The government, while in the short-term seeking to prop up the national economy, is now just beginning to realise that, longer term, fewer people will mean significant unavoidable costs.

While the problem of regional depopulation is overwhelming, it also signals how consumer markets will change over the next two decades. People will increasingly migrate to larger urban areas where basic services survive and are cheaper, and these will remain thriving markets. Choice of location and geographical segments will become increasingly important, and overseas firms in Japan must be aware not only of the problem areas, but also of where opportunities lie. This is true when choosing where to open new SC tenancies or where to spend on A&P, but equally to understand where the pockets of growth are likely to occur in the regions.

On a more political note, the situation is now so near to crisis point that a future government will have no choice but to take a serious look at allowing in more overseas immigrants, refocusing on service industries – even for export markets, and pushing further and faster in terms of adoption of cutting edge technology to make up for labour shortfalls. This again will mean that although many regional cities suffer, some places will remain very affluent and have a growing importance in the market as a whole. It’s important to identify where those will be.