Latest GDP numbers out of Japan came out overnight and though the decline in GDP was expected, it was worse (-0.1% vs -0.6% actual). But is this really a surprise given the continuous decline in the Japanese population – deaths outnumber births now by more than 1,000 per day?

  • The growth rate of Japan’s population started declining in earnest in the mid-1970s, but it turned negative only in 2009. Absent massive rises in productivity, it is natural for GDP growth rate to decline as well in line with the decline in population growth.
  • Still, Japan’s GDP growth rate has been consistently above the growth rate of its population (another way of saying GDP per capita rises) except for a brief period post the 2008 financial crisis. Nevertheless, the average GDP growth rate since 2009 is still above the average growth rate of the population (0.6% vs -0.1%, respectively).

What does this mean? Positive labor productivity growth rate.

  • Since the 2008 financial crisis, Japan’s annual GDP per capita growth rate averaged the same as US’. Even since the 1990s, when Japan’s supposed stagnation started, its GDP per capita was on average just 35bps lower than that in the US.

  • GDP per capita growth can be broken by growth in labor productivity (GDP per hour worked) and changes in labor utilisation. Measured by GDP per hour worked, Japan surpassed USA in 1989. But measured by labor productivity growth, it has outperformed the US since the 1970s at least.

  • High labor productivity can come from many things (greater use of capital, low labor utilisation, innovation). In general, Japan tends to have a lower labor utilisation rate than US. That could mean more automation/ less employment of low productivity workers.

  • Perhaps that is why, Japan also tends to have a lower labor compensation (per hour worked) growth rate than US. However, in 2016, for the first time, that changed.

Bottom line is as long as population continues to decline, GDP should also be expected to decline given also lackluster productivity growth. However, as long as productivity growth is positive, GDP rate of decline should stay above population rate of decline. It could be better, but there is nothing bad about that either.