Japan’s Grim Demographic Reality

Japan’s new prime minister, Takaichi Sanae, has made quite a start. She’s sparked a major spat with China over Taiwan; told us that, like her idol Margaret Thatcher, she apparently gets by on minimal sleep; and dazzled Donald Trump during his recent visit.

In fact, such was Takaichi’s success in impressing the U.S. president that she even got the White House to endorse a narrative that she was borrowing from her mentor, former Prime Minister Abe Shinzo (who himself was recycling it). That, of course, is the proclamation that “Japan is back.”

Is Japan ‘Back’?

Is it, though? To be fair, the statement refers as much to regional security as it does to economic robustness, although the two are not unrelated. But can a country that is losing nearly a million people a year really be “back”? And is a very public claim that you are going to get tough on foreigners and immigration a smart approach when your country is shrinking by the equivalent of a largish city every year, with both national security and economic implications?

The fact that “Japan is back” keeps returning suggests some magical thinking. It is true that Japan has been having a moment. For one thing, it’s enjoying a tourism boom, to the point that even the preternaturally agreeable Japanese are becoming a little disgruntled. Japanese manga, anime and other content commands an impressive international fanbase. There was even a flurry of excitement over rising prices, with some commentators rejoicing that at last Japan had exited decades of deflation. Credit to Takaichi for at least recognizing that, sadly, Japan was experiencing the wrong sort of inflation, cost-push rather than demand-pull.

“Japan is back” is vague enough to be interpreted in different ways, but it refers at least in part to the country recapturing something resembling its postwar heyday, namely the period of dynamic economic growth that ended in 1989. (With my usual stellar timing, that was the year I arrived in Japan.)

That year, Japan had about 123 million people, and its GDP was $3.1 trillion, the world’s second largest. The United States had just under 247 million people, and its GDP was $5.6 trillion. The world’s four biggest companies by market capitalization were Japanese.

This year, 2025, Japan has 123.4 million people and an estimated GDP of $4.3 trillion. It is now the world’s fifth largest economy, behind the U.S., China, Germany, and India. Its GDP was, at the time of writing, less than Nvidia’s market capitalization. The U.S. has 341.7 million people, and its GDP is expected to be somewhere just over $30 trillion.

Nominal figures are of course problematic; for one thing, they don’t account for inflation or currency shifts (although Japan’s years of deflation and recent currency dive are not unconnected to its demographic issues). Using constant 2015 U.S. dollars to account for these, what we can see is that Japan’s economy has grown 40 percent over the past quarter century, while the U.S. economy has more than doubled.

Another data point: The median household income in the U.S. in 2024 was $83,730. In Japan, it was around $27,000. To be fair, the cost of living in Japan is now much lower, there’s no crippling student debt or health care bankruptcies here. A fairer measure, using purchasing power parity, puts the Japan figure about $20,000 lower than the U.S. Nonetheless, the point remains: Japan has not had a good few decades. By 2023 it had slid to 22nd place among OECD countries in terms of GDP per capita, behind South Korea and just ahead of Spain, Slovenia and Czechia.

What happened?

Well, we should acknowledge that Japan in 1989 was (like Nvidia today) experiencing a bubble. And for years, the default argument was to blame Japan’s malaise on the bursting of this bubble, namely the huge asset inflation that occurred in the wake of the Plaza Accords of 1985. This does explain Japan’s “lost decade,” the 1990s. The government was slow to nationalize the private-sector debt and clean up the financial sector with bailouts, closures and amalgamations. By the start of the 2000s, however, it had done this work, and yet Japan never truly recovered, with the lost decade becoming lost decades. By this time, the underperformance could no longer be blamed on a long-ago bubble.

The problem was population decline, particularly a contraction in the working age population of people aged 15 to 64. This population peaked in Japan in 1995, at around 87.0 million. By 2024, it had fallen about 15 percent, to 73.7 million. By 2040, the number is forecast to be below 60 million, creating a labor shortage of about 11 million workers.

Successive governments have tried to respond to this structural decline with the cyclical tools of fiscal stimulus and loose monetary policy. Cyclical tools do not solve structural problems. Japan has attempted structural reforms, and taken cumulatively over the decades they are not insignificant, but always rolled out too little, too late to meet the needs of the moment. Now, in announcing yet another big fiscal stimulus, Takaichi is falling into the same pattern.

Anti-Immigration Turn

Japan could stabilize its workforce in the 2040s, forecasts Oxford Economics, but it would need to consistently accept 500,000 foreign workers a year. And that’s where we arrive at Japan in 2025, a year noteworthy for its sharp anti-immigration turn.

So what exactly is Japan’s beef with foreigners this year? In fact, the country has historically had an uncomfortable relationship with outsiders, and the rhetoric we’re hearing now is hardly unprecedented. But it has intensified suddenly, fueling the rapid rise of the anti-immigration party Sanseito, and apparently compelling the new prime minister to tell a story about foreigners kicking deer in Nara. What gives?

First, it is worth recognizing that much of the day-to-day irritation many Japanese are feeling is actually a backlash to overtourism, and this we’ve seen in other places, like Barcelona. International inbound tourism in Japan hit 36.9 million people in 2024, up from just 8.4 million in 2012. Destinations like Kyoto are feeling the strain, but so are regular commuters in Tokyo. Those misbehaving foreigners you see on video? They’re not permanent residents.

But tourism doesn’t account for all of it. Japanese are confronting changes elsewhere, including foreign workers in the ubiquitous convenience stores (which are suffering from the labor shortage). One of the more noticeable societal shifts is the growing presence of biracial Japanese, or hafu, as they are called here, especially in areas like sport and entertainment. While acceptance has been growing, many Japanese are still grappling with the fundamental question of what it means to be Japanese. And for a significant number, the answer lies in ethnicity. For these Japanese, you can be born and live your entire life here, but if you don’t look the part, you’re not truly one of them.

That sentiment in turn is fueling a debate about dual citizenship. For a country with dire demographics, it would seem obvious to allow citizens to hold more than one passport. For now, the law in principle requires those with dual nationality to choose one before turning 22, although in practice this is hardly ever enforced. Now it has become an issue, though, with Japanese nationalists calling for a crackdown, on the grounds that Japanese passport holders of dubious loyalty could reach senior government positions, ignoring the obvious solution (used in Australia) of requiring people entering parliament to relinquish their foreign citizenship.

Other complaints involve issues like foreign criminals or accusations that foreigners are exploiting Japan’s welfare systems. These claims are not without merit, but they tend to get exaggerated online by gadflies and provocateurs. Those exaggerations then reach locals already unhappy at the rising cost of living and declining economic opportunity, and gives them a target for their discontent. We’ve seen this play out elsewhere.

Indeed, Japan is hardly alone in its anti-immigration backlash. The same sentiments are behind the re-emergence of the far right in Europe and explain in part Trump’s ascendency in the United States. Even traditionally melting pot countries like Canada and Australia are protesting. But there is a critical difference. Take Australia, where protests were sparked after record net overseas migration of 536,000 in the year ending June 30, 2023, about 2 percent of its population that year of 26.7 million. According to World Bank data, Japan’s net migration in 2023 was 175,000, about 0.14 percent of its population of 124.4 million. And Australia doesn’t face anywhere near the demographic issues that Japan does.

In short, Japan is recoiling at immigration before demographically meaningful immigration has even begun. Foreign residents accounted for just 3.2 percent of the Japanese population in 2025, and this proportion is rising in considerable part because of the rapid decline in Japan’s total population. In 2024, about 31.5 percent of Australia’s population was born overseas.

As noted, the backlash helps explain the sudden emergence of Sanseito, Japan’s latest far-right political party, which did surprisingly well in elections this year on a platform of “Japanese First” (ironically rendered using English loan words). To counter this rise, the ruling Liberal Democratic Party (LDP), which has held power for most of the last 70 years in part by recognizing which way the wind is blowing, has itself moved to the right.

Here, it is important to note that much of the LDP’s rightward shift is rhetorical, such as Takaichi’s tale of deer-kicking foreigners. In actual policy terms most of the proposals to date at least are mild, and really not at all unreasonable. For instance, yes, the government may revoke permanent residency for those who don’t pay their tax, pension and health insurance obligations, but only under certain circumstances and after repeated warnings. There is also talk about clamping down on foreigners speculating in Japanese real estate. Entry taxes for tourists will also be raised. This is a long way from ICE raiding a daycare center, as has happened in the United States.

One notable exception involves proposed increases in visa fees, with costs potentially rising by an order of magnitude in some cases. While this would bring fees in line with those of other developed economies, in many cases those economies have much higher median wages. The fees are yet to be decided, but a proposal to raise the cost of visa renewals tenfold to 100,000 yen would make it roughly half the monthly salary of entry-level workers. With Japan already uncompetitive in salary terms, this could make it even harder for business to find the low-wage foreign workers who are vital for keeping industries such as aged-care, construction and logistics running.

Realities of Population Decline

Around this point, someone will always pipe up with “What’s so bad about having fewer people?” After all, many smaller countries do very well. Sanseito leader Kamiya Sohei himself apparently said that Japan could “make do” with a population millions smaller.

Leaders of extremist opposition parties can get away with that sort of nonsense. The government needs to deal in reality. And the reality is that the problem is not your total population, it’s your direction.

For instance, a declining population means an older population, which means rising pension and health care burdens. Japan is facing a future with just 1.5 working people for every person over 65. That imposes an immense strain on both government and household finances, one that is expected to become insupportable in 2040. In the meantime, the strain will limit the government’s ability to spend elsewhere.

A declining population also means hollowed out rural areas, with dying towns, a lack of services and an excessive urban concentration. Japan already has 9 million abandoned homes and a growing number of ghost towns. There are severe implications for agriculture. It also means rising rates of loneliness among elderly people, and a growing dementia crisis.

The falling population has already created a dire problem for Japanese small businesses, which now in an astonishing number of cases are facing closure because they lack successors. This means a loss of services, skills, traditions, and cultural assets.

Population decline is also a national security issue, with Japan increasingly struggling to meet its defense recruitment needs and facing fiscal constraints that make it harder to fund defense.

The Problem With Fertility Rates

Given Japan’s aversion to immigration, commentary often focuses on how to address its total fertility rate, which hit a low in 2024 of just 1.15. The standard prescription usually involves pronatalist policies and a more family-friendly work culture, with Nordic countries often used as a model for how Japan should be. No question, any improvement in the fertility rate is helpful and reforms to Japan’s notoriously conservative work environments would be welcome, but the time when improving the fertility rate alone will make a meaningful difference to the population crisis has long since passed.

For one thing, fertility rates in family-friendly Nordic countries themselves are at record lows; just 1.25 in Finland in 2024. The difference is, as the Swedish ambassador gently pointed out in an interview last year, that Nordic countries have had historically much higher levels of immigration. This immigration not only offsets the overall decline in the fertility rate, but there is evidence to suggest that first-generation immigrants tend to have larger families.

Second, the fertility rate for married Japanese couples is actually a much healthier 1.90. The major problem in Japan, where few women have children outside marriage, is that people are getting married later, if at all. This is in large part associated with economic uncertainty, such as the rapid rise in the percentage of working people in irregular employment. The economic uncertainty is itself exacerbated by population decline.

Third, and most significantly, because of what is known as demographic momentum, the cohort of women in their reproductive years in Japan has already contracted substantially, so that increasing the rate of reproduction has more limited effects. We can see this in projections from Japan’s National Institute of Population and Social Security Research. In its 2023 revisions, the institute’s mid-range projection has the population at 87 million in 2070, with a rather hopeful projected fertility rate of 1.36. The population of those aged 65 and over would be nearly 40 percent in this case. The high-end projection, with a fertility rate of 1.64 (about what France has managed after decades of strong pronatalist policies) has the population at 95 million, with 35 percent of the population over 65. In short, a strong rebound in fertility can ease the pain; it can’t solve the core problem.

Japan’s Options

There are other steps Japan can take. Raising the retirement age is one. If your working age population is declining, it makes sense to redefine “working age,” especially if longevity has been rising. The Japanese government is now encouraging companies to keep employing willing workers until the age of 70, and some companies are doing that. Expect to see this trend gather momentum, perhaps with tax incentives for older workers and their employers.

Similarly, Japan will also continue to encourage women’s workforce participation, although in simple quantitative terms, Japanese women are already well represented in the workforce by international standards.

What about robotics and artificial intelligence, which are already playing a growing role? The problem is that meaningful breakthroughs may have come too late, and Japan’s crisis is too acute, for this solution to be timely. Large companies could perhaps adopt technology at a meaningful scale, but given the current cost and unreliability of robots, for instance, it’s hard to see small business doing so anytime soon.

None of this is to say that Japan ought to pursue wholesale immigration. The concerns are not imaginary and anyway it simply isn’t politically feasible. Nor could Japan do so, even if it wanted to; the country is increasingly unappealing to immigrants, with its stagnant wages, exacerbated by high taxes and a weak yen, combined with a difficult language, stifling workplace culture, and assimilation challenges.

But moderate, steady immigration surely must be part of an “all of the above” approach to dealing with the country’s dire population crisis. Even if mostly rhetoric, Takaichi’s “tough on foreigners” approach would seem very much at odds with repeated acknowledgments at all levels of officialdom that Japan faces a crisis. Sure, the country may get lucky, and be a beneficiary of the great AI jobs heist, but counting on Big Tech to usher in a utopia of any kind seems a risky strategy at best.

If she is to avoid a grim fate for Japan, Takaichi will need to thread the needle between appeasing the right of her party and using every tool at her disposal to ease the country’s population decline. Deploying rhetoric that unleashes nativism and insularity is utterly incompatible with the regional economic and security leadership she seeks to display in her insistence that “Japan is back.”

Image credit: Shutterstock ID: 1584006286. This article was originally published in The Diplomat.