Financing Consumption in an Aging Japan: The Role of Foreign Capital Inflows in Immigration

We project the impact of demographic change on Japanese capital flows by simulating the impact of population aging on Japanese saving and investment rates. As aging depresses saving rates, in our baseline projections, we show that by 2015, foreign capital inflows will comprise about 15 percent of Japanese output. A distinguishing feature of this paper is that we compare the capital flows that occur without immigration to the capital inflows that would occur with immigration of 400,000 people annually. With the larger labor force from immigration and the larger induced capital accumulation, output will be 22 percent higher by 2020, and 50 percent higher by 2040. The higher output means that less capital needs to be imported; by 2015, Japan will be importing only 8 percent of its output.