Gray Menace

Japan's relationship with the United States over the past half-century has been one of remarkable resilience, even through the end of the Cold War and the emergence of new security threats in Northeast Asia. During his February meeting with Japanese Prime Minister Taro Aso, U.S. President Barack Obama emphasized the importance of the alliance by declaring it "the cornerstone of security in East Asia." But a change is occurring in Japan that could rock the foundation of this happy partnership, something far more dangerous for the United States than the prospect of an opposition victory in the upcoming general election: Japan is getting old.

In fact, Japan is the grayest country in the world, with 21.5 percent of its population 65 or over. Not only is the Japanese population aging, it's also shrinking, from 127 million today to a projected 89 million by 2055, the result of a plunging fertility rate. This unfortunate combination is causing the country to lose its edge and dynamism. Older workers are less innovative; older, more "mature" markets attract less investment. Older populations live off savings, rather than generating new capital. And, as the number of working-age citizens diminishes, pension funds will be exhausted and tax revenues and government budgets will be squeezed.

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The Captain of a Sinking Ship
The rise and fall of Japanese Prime Minister Taro Aso, and his party.
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The demographic transformation will in effect become a guillotine, cutting off policy options as Japan tries to deal with the needs of an elderly population. For example, Japan will be more likely to prioritize healthcare than international security. Older societies are typically more risk-averse, and Japanese -- "reluctant realists" at the best of times -- will be increasingly unwilling to put their most precious resource, their young, in harm's way.

This shift poses serious questions for the United States and its increasingly important relationship with Asia. The U.S.-Japan alliance has moved steadily forward over the last decade, with Japan assuming a higher profile when it comes to regional security. But we have probably seen the high-water mark of Japan's international security activities. Even though the region is increasingly tense, Japanese defense budgets have actually declined in recent years (and Japan continues to cap defense spending at 1 percent of GDP) -- a fact that could put U.S. interests in Asia at risk.

Financially, too, considering that Japan's savings has bankrolled much of U.S. spending in recent decades, the country's increasingly elderly population is going to hit the American empire where it hurts. U.S. trade negotiators have long targeted Japan's trade surplus with the United States, but those funds have been recycled back to America to suppress the value of the yen, finance consumption of Japanese-made goods (and support employment), and help the United States cover its steadily expanding government deficits. Until late 2008, Japan was the number one holder of U.S. Treasury bills. (China has overtaken Japan, but as of February 2009, Japan still held $662 billion in T-bills, putting it just behind China.)

An aging Japan will no longer be able to recycle those surpluses. More precisely, an aging Japan won't have those surpluses: Its trade accounts will fall into deficit, and funds that do exist will be badly needed at home. This process is already underway as the country's savings rate declines. According to estimates by the consulting firm McKinsey, the total savings rate in Japan is projected to slide to 0.2 percent by 2024.

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