People cross the street in the busy Akihabara area in downtown Tokyo.
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Japan celebrated “Respect for the Aged Day” earlier this week, a national holiday that underscored a somewhat problematic fact — that the country has a record number of elderly citizens to celebrate.
Japan's population aged 65 or older rose to an all-time high of 36.25 million, government data released ahead of the event showed.
While the country's overall population is declining, the segment of people aged 65 and over has grown to 29.3 percent of the population, the highest proportion of any country, according to the statistics office of the Ministry of Interior and Communications.
The data adds to concerns about demographic shifts and the country's labor crisis, said Robert Feldman, chief economist at Morgan Stanley MUFG Securities.
A survey by Teikoku Databank last month showed that 51% of companies across sectors in Japan feel there is a shortage of full-time employees.
“The labor shortage is still as bad as it has ever been,” Feldman said, noting that it is particularly felt in labor-intensive industries like food service.
Meanwhile, 2023 saw the number of workers in Japan aged 65 and older rise for the 20th straight year to a record high of 9.14 million, according to statistics bureau data.
Feldman warned that as these older workers begin to retire from the workforce, there won't be as many younger workers stepping up to replace them.
There is no one-size-fits-all solution.
Based on recent trends, the proportion of elderly people in Japan is expected to continue to rise, reaching 34.8% in 2040, according to the National Institute of Population and Social Security Research.
Meanwhile, a recent research note by Morgan Stanley's Feldman estimated that based on past demographic trends, the total labor force could decline from about 69.3 million in 2023 to about 49.1 million in 2050.
The Japanese government has recognized the economic and societal damage that can result from these trends and has taken steps to counter them.
Several measures have been taken to reverse the country's declining birthrate, with Prime Minister Fumio Kishida's office rolling out policies such as providing more funds for child-rearing and supporting more childcare facilities in the country.
Local governments have also taken steps to support public dating apps that aim to encourage Japanese people to mingle, marry and have children.
But a higher birth rate will do little to solve the labor shortage in the short term. So Japan has been steadily opening its doors to more immigrants in recent years, reaching a record 2 million foreign workers in 2024 and targeting up to 800,000 more over the next five years, according to local media reports.
Feldman says that making up for the country's projected demographic losses over the next two decades will require the country to add foreign-born workers at a much faster rate, by the tens of millions.
“I don't think that's going to happen, which means that a large part of that decline in the local workforce has to be offset by improving the productivity of those young people who will remain,” Feldman said.
He added that creating this growth in productivity among workers will require more capital to invest in worker productivity and implement new technologies such as artificial intelligence and automation.
Earlier this year, Carlos Casanova, chief economist for Asia at UBP, told CNBC's “Squawk Box Asia” that AI technology is often cited as the solution to Japan's demographic crisis, but has so far done little to alleviate it.
“We have an increasingly consumer-oriented society, so you want to have a large workforce making money and spending money in order to maintain economic momentum,” Casanova said.
“AI can be part of the solution, but there are other things it needs to do,” he added, noting that in addition to immigration, the country is working on social and structural changes such as increasing the female workforce participation rate.
