Of all the problems Japan is facing, the one that may pose the biggest challenge is the decline in its population, the result of social and economic factors that some observers say the country appears unwilling or unable to tackle in any meaningful way.

Japan’s population began falling in 2011. According to the most recent estimate by the National Institute of Population and Social Security Research (NIPSSR), it will fall to 97 million by 2050 from 127.50 million in 2012, a figure that is based on the 2010 birthrate of 1.39 children per couple. By 2100, the population could fall below 50 million, says Ryuichi Kaneko, a population expert and deputy director of the institute. “But even if we are able to raise the birth rate to 2.07, our population will still continue to fall through 2050 and 2100.”

At the same time that the population is shrinking, it is also aging. Japan’s famed longevity coupled with the low birth rate will leave the country with a much smaller working-age population just as the number of elderly residents peaks. Those over 65 now account for about a quarter of the population. By 2050, the over-65s will account for 38.8% of the population, rising to 41.1% by 2100, according to NIPSSR. “The population problem is one of the most difficult and intractable issues that Japan has to deal with,” says Wharton finance professor Franklin Allen.

Hisakazu Kato, a population economics specialist and professor at the school of political science and economics at Meiji University in Tokyo, forecasts that the workforce will fall to 55.64 million by 2030 and to 41.30 million by 2050 from 65.97 million in 2013, reducing the number of taxpayers able to help support the huge burden for elder care. While some other countries face similar demographic crunches, “no other countries have ever experienced what is happening to Japan,” Kato says.

So far, government subsidies and tax breaks have done little to tip the family planning balance in most Japanese households toward greater fertility, and for a good reason. With wages and job security steadily declining while costs rise, most couples opt to have few if any children. In the big cities, working mothers struggle to find affordable child care — if they choose to keep working. Many quit during the early child-raising years, daunted by exhausting commutes and long working hours.

Given those constraints, about 57% of all Japanese working women are employed part-time. They are among the nearly 40% of all employees who work on relatively low-paid, part-time or temporary terms and who cannot afford to get married and have a baby, says Kaneko. “Unless young people have bright prospects for the future, they will not be keen to get married and have a child.”

Japan’s famed longevity coupled with the low birth rate will leave the country with a much smaller working-age population just as the number of elderly residents peaks.

The evolution of the workforce away from a full-benefits, salaried employment model has been reinforced by labor rules that require companies to pay a hefty share of an employee’s social insurance and other benefits if he or she earns more than 1.3 million yen ($12,830) a year.

Redressing Japan’s population problem calls for fundamental changes in labor policy, corporate management, education, gender relations and economic structure – strategies which some observers say the Japanese have so far appeared reluctant to consider. The other possible option is an opening of the country’s borders and its society to immigration on a much wider scale. This also has been a difficult issue for Japan to take on, given that it is an island nation with insular tendencies.

Immigration – a Non-starter

In 2005, Japan’s Ministry of Economy, Trade and Industry estimated that an influx of some 18 million immigrants would be needed by 2030 to maintain the population at its current level. In a 2001 report titled, “Replacement Migration: Is It a Solution to Declining and Aging Populations?” the United Nations estimated that Japan would need 46 million immigrants by 2050 to keep its population and economy stable.

A trip up north to Japan’s snow country in Akita prefecture offers a glimpse into the demographic future. While aging is a nationwide phenomenon, it is progressing much faster in places like Akita, whose population is forecast to fall to 700,000 in 2040 from almost 1.1 million in 2010. The region’s elder population – those over 65 — is due to rise to 43.8% of the total by 2040, from 30% in 2010. “When you walk in local cities like Akita, you do not see many people walking there,” Kato said.

After several decades of slow growth, Akita lacks job opportunities for its young people. Weak transport links to the region are a further obstacle. Local efforts to build up new industries — such as wind and solar power, modern farming and elder care — have not taken off. Shuttered shops and empty villages are the face of Japan’s future, says Hidekazu Masubuchi, senior managing director at the Akita Economic Research Institute. “The decline and aging of the population is not just Akita Prefecture’s problem. It is Japan’s problem. The government has to come up with some solution soon. It is a very serious problem.”

As for solutions, Allen believes that increasing the birth rate is the only reasonable option, since immigration is a non-starter for most Japanese. “I do not think immigration is a viable option unless something drastic happens. Increasing the birth rate is the best way for Japan.”

Unfamiliarity with foreign religions, customs and lifestyles has left most Japanese wary of large groups of foreigners living permanently in their midst. But the issues extend beyond cultural concerns. “If we can cope with them, it is a good idea to have more immigration. But as those immigrants get older, Japan will face the burden of their old age pensions and health costs,” Kaneko says.

Foreigners accounted for about 1.2% of the total population in Japan in 2013, according to the Ministry of Internal Affairs and Communications. That compares with 13% in the U.S. and 12% in Britain. Many Chinese are living and working in Japan, but mostly on student visas that afford them little legal protection and deprive them of health insurance and other benefits.

A Political Taboo

So far, calls for openly increasing immigration remain a political taboo. “Japanese are not willing to accept immigration because this is an island country with an island country mentality and culture. People are afraid of immigrants taking their jobs,” says Kato. “Many people do not think that the population decline is serious issue, so they do not see any urgent need for migration. That is why they are not willing to accept immigration.”

The unhappy experience of many descendants of ethnic Japanese emigrants from Brazil suggests that the reluctance may turn out to be mutual. After bringing in thousands of workers to help cut labor costs for manufacturers, Japan sought to send many of them back to South America during the downturn following the global financial crisis.

“Unless young people have bright prospects for the future, they will not be keen to get married and have a child.” –Ryuichi Kaneko

Other barriers could also block the way of more permanent immigration. The Welfare Ministry, for example, estimates Japan will face a shortage of 900,000 nurses by 2025, so to help fill jobs in elder care and nursing, authorities are allowing in some foreign workers. But many of those guest workers have not managed to pass a rigorous Japanese language national certificate exam required of those who wish to stay beyond a two-year training period. Only 128 out of 322 passed the exam in 2013.

The question of whether or not to allow much more immigration may be a moot issue, however, if Japan’s economy shrinks and the currency weakens as the population declines in 20 or 30 years, suggests Kato. He expects Japan’s economy to contract by 2030 and to continue shrinking as the population falls further.

Without sufficient economic growth to sustain labor demand, along with the added boost to earnings from a strong currency, Japan may lose its luster as a destination for migrant workers in 20 or 30 years, given the strains of living in crowded, expensive cities like Tokyo and Osaka. “Salaries offered in Japan would not be attractive because they are likely to decline. And the weaker yen would further reduce their value in dollar terms,” he says.

So, if Japan is to go it alone in resolving its population crisis, it must raise its birth rate. Kaneko predicts that even if Japan were able to raise its birth rate of 1.39 (2010) to 2.07 now, Japan’s population will continue to decline to 113.35 million by 2050 from 128.1 million in 2010, and will further decline to 105.0 million by 2100.

If Japan were to raise its birth rate to between 2.0 and 2.1 from the current 1.39 (2010), the population might stabilize at about the 80 million level, says Hiroshi Kito, a population history expert and professor of economic history and history demography at Sophia University.

Higher Incomes, More Children

Getting families to have more children — reversing the trend toward smaller families seen in virtually every society as it grows affluent — would require higher incomes, says Yoshio Higuchi, a labor economy specialist and professor of business and commerce at Keio University, who has participated in government advisory committees. But the Japanese business community, obsessed over labor costs, is working at odds with that goal: A suggestion to reduce the minimum salary for which companies have to pay social benefits to 800,000 yen a year from the current 1.3 million yen drew very strong opposition from corporations, which appealed to lawmakers not to make such a change.

Apart from the prospect of seeing the economy shrink further as the country ages, Japan is facing a social security crisis given that a smaller working-age population will have to support the huge elder population, noted Richard Jackson, a senior fellow and director of the Global Aging Initiative at the Center for Strategic and International Studies in Washington D.C., in his article, “Japan’s Demographic End Game.”

“According to a projection by the CSIS Global Aging Initiative, the cost of maintaining the current generosity of pension and health benefits for the elderly would add an extra 7% of GDP to government expenditure by 2030. Japan cannot possibly raise the tax enough to cover the growing old-age dependency burden, since potential future revenues are already pre-committed to stabilizing its Greek-sized public debt,” Jackson said.

“I do not think immigration is a viable option unless something drastic happens. Increasing the birth rate is the best way for Japan.”— Franklin Allen

Kato, of Meiji University, is among many Japanese experts who say the government will have to drastically reduce pension payments, raise the age at which pensions begin (currently at 65) and raise the national sales tax to at least 20% — a scary prospect given that the impact of a 3 percentage point increase in the tax, to 8% on April 1 is seen as a potential threat to the economic recovery.

By 2030, the Japanese government will be paying out US$747 billion (74.7 trillion yen) annually in public funds for social security benefits, including pensions, medical insurance and elderly care payments, Kato says. “Japan’s debt is already big and this will be very serious.” According to Moody’s, at 245.4% of GDP, Japan’s government debt in 2013 was already by far the highest government debt burden of any developed nation. “Japan may have to raise the consumption tax to over 20%, but politicians say there are too many obstacles. Even raising the tax from 5% to 8% took so much effort,” Kato says.

Raising retirement ages appears almost inevitable, given the likelihood of future shortages of manpower and rising costs for pensions. Japan could use its labor force aged 65 and up in a much more productive way, especially given the relatively good health of many long-lived elder Japanese, says Kaneko. “If Japan were to change how it employs people, there are many talented aged people above 65, who could remain in the workforce, working two to three days a week or flextime.”

However, that could require a major rethink, says Kato, since many older Japanese have yet to join the computer age. “It is not just a matter of the number of workers but of their ability. Can they work with mobile devices or smart phones?”

Not all experts view the prospect of a smaller population as an emergency. As a resource-scarce nation, Japan has long struggled to feed its people. During the colonial period of the 19th century and early 20th century, such pressures prompted its expansion into neighboring regions. After its defeat in World War II, only by becoming an export powerhouse was Japan able to lift its living standards to today’s relatively affluent level.

A smaller population would require fewer exports. “Sweden’s economy is one-fifteenth the size of Japan’s economy, with one-twentieth of its population. North Europe maintains stable economic growth and has good companies. They have a good birthrate and their social security systems work well. Can’t we copy them?” asks Kato.

But even Sweden, with a population of 9.03 million and a US$525.7 billion GDP in 2012, has had to scale back its retirement benefits following a national discussion over the issue. “Can Japan hold such a discussion about changing the pension system? I think it is very difficult to copy them,” Kato adds.

“Some Japanese say a population of 100 million is too big, and it would be OK to have a smaller GDP. But as long as we can maintain our present GDP, we will be able to continue to have the present standard of living, so most Japanese think we need to keep the current scale of our economy,” says Kito. Japanese corporations, already increasingly focused on faster growth in emerging markets, have little incentive to invest at home as the market shrinks.

Without a major technological breakthrough or some other unexpected game changer, Japan is facing at least three decades of declining population. Kito favors public policies explicitly advocating a higher birth rate. But even if such policies were to succeed, it would take at least three decades to raise the birth rate to two and even longer — about 60 to 70 years — for the population to begin to grow, he says.

“We have been warning that the population decline is a very serious issue for more than two decades, and Japan has not come up with any measures at all,” Kato says. If Japan wants to encourage more immigration, it needs to do so now, or at least within the next decade, he says. “It will be too late to open up immigration 20 years later. But who has to act now? It is Japanese politicians and the Japanese public.”