Executive summary

Key findings

  • Japan is experiencing an unprecedented demographic transition. The population is both declining and ageing very rapidly. On current projections, the population is expected to decline by around 23% between 2010 and 2050, with the elderly (65+) share of the population rising from around 26% today – the highest in the OECD area – to almost 40% at mid-century.

  • Most OECD populations are ageing fast and some are shrinking. At least six OECD countries are projected to have populations more than 10% below their peak by mid-century; ten will have elderly population shares in excess of 30%. Japan’s current efforts to address demographic change are therefore of great relevance to many other OECD countries.

  • Japan’s prosperity depends more than ever on productivity. The working-age population is shrinking by about 1% per year and this will accelerate to 1.7% in the decades to come. To maintain aggregate growth of GDP of around 2% per annum over the period to 2050, Japan would need, other things being equal, to achieve an average annual rate of growth of more than 3% in GDP per worker. In reality, labour supply as well as productivity will have to improve. Given very strict immigration policies, this means that mobilising women and older workers will be more important than ever.

  • Demographic shifts have important spatial consequences. The government projects that more than 60% of the inhabited grid squares in Japan will lose over half their population by 2050, with almost a fifth becoming uninhabited. Only 2% are projected to experience population growth.

  • The concentration of both population and economic activity in Japan is high and rising. The metropolitan areas of Tokyo, Osaka and Nagoya occupy 5.2% of the country’s territory but are home to around 46% of its people and generate around half of GDP. Concentration, moreover, has been increasing steadily, with many rural areas and small towns suffering rapid depopulation.

  • Spatial disparities are unusually low and do not appear to be increasing. Despite increasing concentration of activity and population, Japan in 2010 recorded the second-lowest inter-regional Gini co-efficient for GDP per capita in the OECD and the lowest disparities in the OECD between predominantly urban and rural regions, reflecting, among other things, a long-standing commitment to well-defined levels of infrastructure and service provision across the country.

  • Japanese cities suffer from fragmented governance. Micro-data analysis suggests that the productivity of Japan’s major cities benefits greatly from their ability to generate agglomeration economies. However, the analysis also suggests that governance fragmentation undermines performance, particularly in metropolitan areas with populations in the 0.5-2.7 million range. Greater co-ordination among municipalities in these metropolitan areas could pay handsome dividends.

  • Rural Japan is comparatively prosperous by OECD standards. Despite the challenges they face, predominantly rural regions in Japan have average levels of per capita GDP about 14% above the OECD-wide average for such regions. In recent years they have also enjoyed higher growth in GDP per capita and far better labour market outcomes than their OECD peers.

Key messages and policy recommendations

  • Demographic change offers opportunities as well as challenges. The economic consequences of population decline and ageing depend largely on the response of both sectoral and spatial policies. Shrinking domestic markets, fiscal strains and service-delivery challenges clearly loom large, but there are also opportunities for more space-intensive activities, more flexibility in land use, less congestion, lower housing costs and less environmental pressure.

  • Spatial planning and spatial policies will be critical in shaping this policy response. Given the dramatic impact of demographic change on the settlement pattern, spatial policy in Japan is now of tremendous importance. It is being set within a long-term, government-wide approach to demographic change that aims to turn Japan’s demographic and economic challenges into opportunities for growth and enhanced well-being.

  • The authorities’ “compact and networked” vision for Japan’s future seems broadly right. The new National Spatial Strategy (NSS) aims to sustain a settlement pattern that facilitates the realisation of agglomeration economies while avoiding the abandonment of large parts of the national territory. The NSS envisages a series of measures, including plans for multifunctional “small stations” to support service provision in rural areas and strengthened links among proximate cities to support agglomeration economies.

  • Diversity is the other key priority underlying the NSS. As the population declines, the competition among regions and cities for people and resources will intensify. Regions and cities will need to identify their specific assets and potentials to attract people and investment. This diversity of endowments and strategies, in turn, will give rise to the possibility of identifying complementarities among places and building strategies to exploit them.

  • Policies concerned with innovation, entrepreneurship and labour-market institutions will have to adapt. Improvements in productivity will depend in large part on more effective policies to promote innovation entrepreneurship. Achieving higher labour force participation, especially among women, as well as encouraging longer careers, will require finding ways to promote healthy ageing and to make it easier to combine careers with parenthood. Better child-care provision and a shift away from the “long-hours” culture will be of particular importance.

  • Enhancing the global competitiveness of the three cities is critical to Japan’s prosperity. A new super-high-speed maglev rail line is to knit Tokyo, Osaka and Nagoya into a single urban mega-region. For the maglev to realise its economic potential, this investment in hard infrastructure must be accompanied by appropriate “soft” policies, particularly policies to promote entrepreneurship, innovation and venture investment.

  • Cities outside the metropolitan areas must learn to work together. The evidence suggests that the performance of cities outside the “big three” would benefit from reinforced efforts to link nearby cities together, to sustain agglomeration benefits and urban services, as envisaged in the NSS. This will require tools for governance co-ordination, as well as infrastructure connections.

  • Rural revitalisation efforts must be based on local assets. While rural areas face more severe depopulation challenges than other places, many rural communities are pursuing asset-based community development strategies in response to structural change. Rather than simply relying on external support, they are taking advantage of new opportunities to use technology and rural-urban linkages to innovate, attract investment, enter new markets and sustain local prosperity and well-being. Many of these strategies offer lessons for others.