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As the population of the world's developed economies grows older, the causal effect of aging on the macroeconomy is bound to land at the top of academic and policy research agendas.
This effect can be seen most clearly through the lens of labor markets. In the U.S., aging features prominently in the debate on causes of the declining labor force participation rate.1 Also, labor market "fluidity," or the flows of jobs and workers across employers, has decreased partly in response to an aging population.2 Similarly, the decline in the business startup rate in the U.S. over the past 30 years has been largely attributed to an aging workforce.3 Some have also questioned whether aging of the population is a cause of the low inflation in the U.S. since the 2007-09 recession.
Since the average age of Japan's population is older than that of most other developed countries, Japan provides a laboratory for studying the causal effects of aging. In Japan, the ratio of the population older than 64 to the population between 15 and 64 has increased since 1990 at a steady pace, while inflation and output have fallen over the same time.4 Because of these demographics, a new wave of research papers has emerged on a potential causal effect of aging on the economy.
In this article, we provide an overview of selected works on the effect of aging on inflation in Japan. We then look into whether the Japanese experience provides an expectation for causality between aging and low inflation in the U.S. by reviewing recent cross-country evidence.
Aging and Deflation: Japan's Experience
A population's average age can be shifted upward by two mechanisms: a decline in fertility (which eventually decreases the number of those potentially entering the labor force) and an increase in longevity (which increases the share of older workers in the population). Japan has experienced a marked decline in fertility since 1950-1955, when the fertility rate was 2.75 births per woman; for the past 40 years, the rate has been below two births per woman. (See Figure 1.) Simultaneously, Japan has experienced increases in longevity (see Figure 2), which have produced not only an older population but...