The main concern preoccupying investors at the G20 meeting in late June was the potential for a trade war between the US and China. But Japan's finance minister Taro Aso highlighted a longer-term threat: the aging global population. The G20 host country's situation in that regard is more worrisome than most of its peers'. In 1950, there were more than 10 working-age people for every pensioner in Japan. This ratio had fallen to 3.3 by the turn of the century, and it's expected to drop to 1.4 by 2050. Japan's position, if extreme, is not unique: the economic, social, and political impacts of aging populations are increasing around the world.
This will have implications for policymakers and individuals. It will also present opportunities and challenges to business owners and executives. We believe there are five main issues businesses should be considering.
- Anticipate and adapt product and service offerings to meet future demand. One notable role model in this regard comes from Japan. Unicharm, a baby diaper producer, anticipated that its core market segment – babies and toddlers – would shrink due to sustained low birth rates. The firm responded by designing and marketing sophisticated adult diapers to Japan’s growing elderly segment. Being the first company to do so at scale brought competitive advantages. Today, sales of adult diapers in Japan outstrip those of baby diapers.
- Adapt your processes, training, infrastructure, and use of automation to prepare for an aging and potentially shrinking workforce. Japanese companies have addressed labor shortages in two main ways: introducing automation and robotics in response to a lack of young workers, and encouraging employees to work beyond the statutory retirement age, often as part-time staff. The OECD estimates that the effective retirement age in Japan is now close to 70 because of these more flexible working arrangements. Nonetheless, skill shortages remain a substantial hurdle for the Japanese economy.
- Prepare for key changes affecting your economic and business environment. Demographic change affects economic growth, currencies, real estate prices, and financial markets. It also influences a country’s longer-term inflation outlook through the demand and supply of physical (goods), intangible (services), and financial capital – but the impact is not homogenous across all countries.
- Prepare for regulatory and tax changes triggered by demographic change. Tax, levy, and fee increases are extremely likely in aging societies. Governments may face greater financial pressure from a rising share of the population receiving state funding, e.g., pensions, healthcare, long-term care, and pensioner rebates. For example, value-added taxes have increased or are likely to increase in countries furthest in the aging cycle, such as Germany (from 16% to 19% in 2007), Japan (from 8% to 10% in October 2019) and Italy (from 22% this year to 26.5% in 2021). Government pension and healthcare contributions and personal income taxes also tend to rise.
- Plan your corporate succession and personal finances early. The earlier a business owner or executive starts preparing to transfer a company to the next generation of managers or to external buyers, the better the outcome tends to be, both financially and emotionally.
So we believe that companies that analyze their business and economic environment through a demographic lens are likelier to seize new opportunities and build more resilient operating models by anticipating potential business risks. For more detail, please read our latest publication for Executives & Entrepreneurs: "Five tips to prepare your company for demographic change."
We also believe investors can find opportunities in the aging global population, and many of our Longer Term Investment themes are influenced by this trend – including "Silver spending," "Retirement planning," "Retirement homes," and "Health tech."
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