Social Sciences in China (Chinese Edition)

No. 1, 2022

Depopulation and Secular Stagnation: A Theoretical Discussion of Japan and Its Lessons for China

(Abstract)

Yin Jianfeng

Literature on demographic problems and secular stagnation suggests that population aging will cause an excess of desired savings and a dearth of desired investment, thus leading to persistent stagnation. Therefore, expansionary fiscal and monetary policies are required to stimulate investment. However, the literature on this issue to date has overlooked the critical phenomenon of its negative population growth. Among major economies, Japan stands out as an example of secular stagnation and the first country to face depopulation. Using the example of Japan, we build a simple overlapping generations model (OLG) on the basis of non-negative investment constraints (NNIC) and zero lower bound interest rates (ZLB) and discuss a non-equilibrium mechanism where, in the context of depopulation, capital-to-output ratio continues to increase and the marginal product of capital (MPK) and the relative price of capital continue to decline, resulting in a persistent economic downturn. Monetary policy fails because it cannot stop the fall in the relative price of capital, and expansionary fiscal policy aimed at spurring investment only creates a more serious excess of capital. During the negative population growth, the only viable way to raise MPK and restore economic equilibrium is to increase the labor force, which is a relatively scarce factor of production compared with the excessive capital stock. Given this, fiscal policy can be effective when maternity subsidies are provided and spending on education, scientific research and healthcare are increased.