Turning Japanese

The problems being created in Europe by an ageing society are well documented. Could the solution to the problem be found in the world’s oldest society of Japan? An article entitled ‘Aging gracefully: What the West can learn from Japan’, released last week by Schroders, suggests that there are many lessons to be learnt from the way Japan, which has a median age of 44.7 years – about 5 years higher than the developed country average, and more than 15 years higher than the global average – has handled its demographic crisis. The first is: act early. 
“The key point is that Japan recognised its ageing problem early, and took steps to reform both the health and pension systems to contain age-related spending,” say the article’s authors, Virginie Maisonneuve and Katherine Davidson.
The healthcare system has been carefully redesigned to prevent over-use and disproportionate use of high-cost services. As a result, Japan spends just 8.1% of its GDP on healthcare compared with 16% in the USA and an OECD average of 8.9%.

Reform of the pension system has also focussed on cost containment. Measures taken since the 1980s include relatively low replacement rates, raising the pensionable age from 60 to 65 and indexing pensions to prices rather than earnings. Furthermore, in a highly far-sighted move, Japan has taken advantage of the ‘demographic dividend’ that has existed for much of the past 50 years, when there was a large working age population with a small number of dependents, by setting pension contribution rates higher than necessary for contemporary needs and using the surplus to create a reserve fund. The fund’s value now stands at $1.2 trillion.

A key factor in Japan’s graceful ageing process is older people’s willingness to continue working and Japanese companies’ willingness – to some extent driven by legislation – to employ. There are lessons here for western companies, but also dangers.

“There has been very little written on how to manage older workers, and an aging workforce can lead to spiralling wage bills if salaries are driven by seniority,” say Maisonneuve and Davidson. “As legal and effective retirement age increases, Western companies will need to become more cognizant of the costs and benefits of older workers.”

An ageing population and workforce also require companies to rethink their marketing. In Japan, companies are employing marketing managers to focus on silver consumers, and niche companies have sprung up offering such delights as robot pets, indoor vegetable gardens and multi-coloured incontinence pads.

The central lesson for investors, say Maisonneuve and Davidson, is that they need to recognise well in advance the markets, industries and companies that are best-placed to meet the demographic challenge. “Demographic change will alter the competitive landscape for each and every company worldwide. Investors must be able to identify the ones that will adapt, survive, and thrive.”

At the same time, there is only so much reform can achieve. A dramatically ageing population will hamper economic growth, and so it is that Japan’s latest play is to try and raise its birth rate by offering a ¥26,000 monthly childcare allowance and free schools

Fiona Rintoul, Editorial Director
©2010 funds europe

Executive Interviews

INTERVIEW: Put your money where your mouth is

Jun 10, 2016

At Kempen Capital Management, they believe portfolio managers should invest in their own funds. David Stevenson talks to Lars Dijkstra, CIO of the €42 billion manager.

EXECUTIVE INTERVIEW: ‘Volatility is the name of the game’

May 13, 2016

Axa Investment Managers chief executive officer, Andrea Rossi, talks to David Stevenson about bringing all his firm’s subsidiaries under one name and the opportunities that a difficult market...


ROUNDTABLE: Beyond the hype

Oct 13, 2016

The use of smart beta investing continues to grow. Our panel, made up of both providers and users, discusses what the strategy actually means, how it should be used and the kind of pitfalls that may arise when using this innovative investment technique.

MIFID II ROUNDTABLE: Following the direction of travel

Sep 07, 2016

Fund management firms Aberdeen and HSBC Global meet with specialist providers to speak about how the industry is evolving towards MiFID II.