Fuelling Japan’s growth recovery amid demographic crises

Japan holds the record as one of the fastest-aging countries in the world. With about 30 per cent of its population aged 65 or older, the country faces a continuous decline in its working-age population, and this weighs negatively to economic performance. Since 2010, Japan’s population has been shrinking, and its fertility rate at 1.3 births per woman shows no sign of substantial recovery.

Its neighbour, South Korea, which holds the world’s lowest fertility rate of 0.72 in 2023, is set to overtake Japan in terms of demographic aging. Despite these trends, both Japan and South Korea have some of the lowest shares of immigrants among countries under the Organisation for Economic Co-operation and Development, with foreign residents accounting for only 2 and 5.2 per cent of their populations, respectively.

These demographic changes are straining public finances through rising pension obligations and increasing healthcare costs. In Japan, social security expenditures account for more than one-third, or JPY 38.3 trillion (USD 26.8 billion), of the 2025 national budget to address child-rearing and health concerns. Additionally, the increase in government health spending correlates to the population decline in Japan as seen in Graph 1, accounting for about 25 per cent of annual public spending between 2017 and 2019.

Labour shortage

A prominent feature of the demographic change is the intensified labour shortage, prompting efforts to maintain economic vitality through structural reforms. In 2018, the government implemented the “Work Style Reform” law that limits overtime and targets greater labour market efficiency. This law mandates paid leaves and narrows the wage gap between regular and non-regular employees. Yet challenges persist.

Despite modest improvements in 2024, Japan’s wage growth has remained stagnant for nearly three decades – a reflection of its entrenched lifetime employment system and seniority-based pay structures. Meanwhile, the services sector, accounting for about 70 per cent of GDP since 2012, continues to absorb much of the elderly workforce.

Meanwhile, the migration policy has been evolving slowly but steadily to address domestic labour shortages. The Specified Skilled Workers (SSW) program introduced in 2019 represented a practical shift, allowing foreign workers to fill shortages in 16 industries, including nursing care, construction, and agriculture. Unlike earlier rules, like the Technical Intern Training Program where interns can only work for five years in lower-skilled jobs, the SSW pathway offers the possibility of longer residency for skilled workers.

Japan had about 2.3 million foreign workers in 2024, an increase of nearly 300,000 from the previous year. Nonetheless, estimates suggest that Japan may need an additional 6.7 to 11 million workers by 2040 to fill vacancies and sustain a moderate growth rate of around 1.2 per cent annually. Alongside labour market reforms and immigration adjustments, innovation is being positioned as a core pillar of Japan’s growth strategy. Under the Society 5.0 initiative, the government is promoting the integration of artificial intelligence, robotics, and digital technologies across sectors, with a focus on healthcare and elderly care.

A budding health sector

The spotlight is on Japan’s health sector as the country grapples with demographic shifts. Social security and healthcare spending already account for a lion’s share of national expenditure to enhance medical services, eldercare infrastructure, and medical technology, including digital health management tools. In particular, health technologies such as robots that lift patients from their beds and detect falls have become widespread in the country due to rising demand. Other uses of these function-specific robots include the world’s first bladder monitoring wearable device and AI-based disease detection and diagnostic devices.

The resounding focus on health technologies has also intensified investments in healthcare-related stocks. Graph 2 shows that Japanese pharmaceutical firms such as Takeda Pharmaceutical, Daiichi Sankyo, and Terumo saw relatively stable stock market performance in April despite some turbulence in global indices. MSCI Japan’s healthcare index performance over the years also portrayed the sector’s overall attractiveness to investors.

While Japan’s demographic change continues to be an impending threat, one can see that it could be an avenue for the country to lead global advancements in medical technology tools. Whether through labour reforms, strategic immigration policy changes, or added investments for technological innovation, Japan’s economic resurgence will depend on how effectively it can turn these constraints into opportunities to drive growth. Championing medical robotics and telemedicine as new growth engines not only addresses domestic aging needs but also opens new opportunities for foreign investment and trade.   

Central bank’s outlook

Despite the aging-induced deceleration of Japan’s economic growth, the Bank of Japan (BOJ) projects about 1 per cent GDP expansion in 2025 and 2026, showing a half percentage point improvement from 2024. The BOJ attributed the moderate growth seen in 2024 to rising private consumption, which accounts for more than 60 per cent of Japan’s GDP.

Meanwhile, labour reforms could be felt as reduced working hours has given room for capital accumulation and increased productivity thanks to digitalization that enhanced employee efficiency. Thus, the central bank projects a pickup in the country’s growth potential.

The BOJ remains positive about easing prices, projecting a drop in inflation to 2.5 per cent in 2025 and 2.0 per cent in 2026. Consumer spending has increased moderately as inflation remains above 3 per cent in 2025, while households’ financial asset portfolio saw shareholdings grow by 15.6 per cent.

The BOJ’s exit from a negative interest rate regime, combined with rising wage pressures and a momentary boost in exports due to a weaker yen, signal tentative steps toward a more sustainable growth trajectory. However, the success of this transition will depend on the health industry’s ability to spur additional economic activity, and therefore, growth. With Japan’s healthcare technology sector already gaining global reputation, the sector offers investors an entry point to both domestic and global expansion prospects.

This original article has been produced in-house for Lundgreen’s Investor Insights by on-the-ground contributors of the region. The insight provided is informed with accurate data from reliable sources and has gone through various processes to ensure that the information upholds the integrity and values of the Lundgreen’s brand.