Japan's biggest problems and solutions: shrinkage, debt, stagnation – Is the third-largest economy on the brink of decline? – Image: Xpert.Digital
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Japan, the Land of the Rising Sun, is struggling with deep shadows that cast a shadow over its future. Behind the facade of technological innovation and cultural fascination lies a complex web of structural crises that have been developing for decades and are now reaching their climax. At a critical juncture in its history, Japan faces four massive, closely intertwined challenges: unstoppable demographic change, persistent economic stagnation, record-high national debt, and a crippling labor shortage.
These problems form a vicious cycle: The shrinking and aging population is slowing economic growth and exacerbating labor shortages, while the government attempts to counteract this with ever-increasing, debt-financed economic stimulus packages. The consequences are already being felt in everyday life: rural areas are dying out, the famous 24-hour service culture is crumbling, and companies are fighting for survival. In response, the government is making unprecedented efforts – from promoting women and older workers to the tentative use of robots and cautiously opening up to foreign workers. But are these measures enough to avert decline? This comprehensive overview analyzes Japan's biggest problems, sheds light on solutions to date, and ventures a glimpse into the future of a nation fighting for survival.
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What are the main challenges facing Japan at the moment?
Japan today faces a number of structural problems that have plagued the country for decades and are continually worsening. The most significant challenges can be divided into four main areas: demographic change, ongoing economic stagnation, record-high national debt, and acute labor shortages. These problems are closely intertwined and mutually reinforcing, making the search for solutions particularly complex.
Demographic change forms the foundation of all other problems. Japan has the highest proportion of older people in the world – 29.3 percent of the population is now over 65 years old, compared to just 20 percent in South Korea and 15.4 percent in China. The population has been shrinking continuously for 14 years and reached a new record high in 2024, declining by 801,000 people to 122.4 million. The development in births is particularly dramatic: only 720,988 children were born in 2024 – the ninth consecutive record low.
How serious is the demographic crisis?
Japan's demographic development is unique worldwide in its speed and intensity. The ratio of the working population to the number of retirees has deteriorated dramatically. While in 1980 there were 7.4 employed persons per retiree, by 2010 this figure had fallen to just 2.7. The ratio is expected to fall to 1.8 by 2030 and even to just 1.3 by 2050.
The fertility rate, at only 1.15 children per woman, is significantly below the 2.1 required to maintain the population. This low rate is the result of several social factors: many people marry late or never, the high cost of living makes having children a luxury, and traditional gender roles make it difficult for women to balance work and family.
The consequences are already being felt everywhere. Entire regions are dying out, over 900 communities are threatened with "extinction," millions of homes are empty and dilapidated, and schools are being closed. By 2060, Japan's population is expected to shrink to just 86.7 million people—a decrease of almost 40 million from today.
What economic problems are burdening Japan?
Japan's economy suffers from a multitude of structural problems, some of which have existed since the 1990s. The so-called "lost decades" began in 1990 with the bursting of a gigantic financial and real estate bubble. Real estate prices collapsed to about a quarter of their previous levels, the Nikkei index fell from just under 40,000 to 16,000 points, and the country slipped into a prolonged deflationary spiral.
Even today, Japan is still struggling with the aftermath of this crisis. Economic growth is weak—GDP growth of only 0.5 percent is expected for 2025. While the threat of deflation has been averted, inflation is causing new concerns. In April 2025, core inflation was 3.5 percent, well above the central bank's target of 2 percent.
An additional problem is the trade conflict with the United States. Japan is heavily dependent on exports, especially in the automotive industry. The 15 percent tariffs imposed by the US government on Japanese goods are placing a significant strain on the economy. This uncertainty is causing many companies to postpone or halt investments.
How dramatic is the national debt?
Japan has the highest national debt ratio of any industrialized country. The gross debt ratio is approximately 237 to 260 percent of gross domestic product—more than twice as high as even Greece's at the height of the euro crisis. National debt is estimated at 1,466.7 trillion yen (approximately €8.7 trillion) by 2025, and rising.
The structure of this debt is particularly problematic. The average maturity of government liabilities is only 3.3 years, while government financial assets have a duration of 24.1 years. This discrepancy means that interest rate increases immediately result in higher financing costs without a corresponding increase in returns on long-term investments.
The Bank of Japan finds itself in a dilemma. After years of zero interest rate policy, it raised interest rates in 2024 for the first time since 2007—to 0.5 percent. Further interest rate hikes are planned, but each increase places an additional burden on the national budget. At the same time, high inflation makes further interest rate hikes necessary.
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How acute is the labor shortage?
The labor shortage in Japan has now affected all sectors and is being continuously exacerbated by demographic trends. The working-age population aged 15 to 64 has declined from around 87 million in the 1990s to approximately 74 million today. Rural regions are particularly affected, where the number of people of working age has declined by as much as 20 percent in some cases.
The consequences are visible everywhere. There's a shortage of truck drivers in the logistics industry, and the average age is over 50. Convenience stores and fast-food chains are reducing their opening hours or relying on self-service. Many stores are now closed at night—a radical change for a country previously known for its 24-hour availability.
The situation is particularly dire in the nursing sector. The government estimates that there will be a shortage of more than 500,000 nursing staff by 2040. Many facilities are already unable to accept new residents due to a lack of staff. The labor shortage is increasingly becoming a direct risk of insolvency: In the first half of 2025, 172 companies explicitly cited staff shortages as the reason for their insolvency.
What are the direct effects of the labor shortage?
The staff shortage has already noticeably changed daily life in Japan. The traditional Japanese service culture with its round-the-clock availability is rapidly crumbling. Many convenience stores, once the backbone of Japanese consumer culture, are forced to close at night or switch to unmanned systems.
In the restaurant and retail sectors, staff shortages are leading to shorter opening hours and longer waiting times. Hotels are struggling to cope with rising tourist numbers due to a shortage of cleaning and service staff. Many hotels are already employing foreign staff on temporary trainee programs.
Even public services are affected. In rural areas, bus and train services are canceled, swimming pools remain closed in the summer, and in some cities, newspapers are no longer delivered daily. These developments are exacerbating rural exodus and accelerating the decline of entire regions.
For companies, the labor shortage means rising labor costs and productivity losses. Small and medium-sized enterprises often cannot keep pace with the wage increases necessary to retain employees. In the first half of 2025, 4,990 companies filed for insolvency—the highest number in eleven years.
How is the government trying to stop the population decline?
The Japanese government has recognized the problem and initiated various measures to counteract the population decline. Prime Minister Fumio Kishida described the situation as a turning point for society and announced unprecedented measures. Plans to double the budget for child-related measures are to be presented by June 2023.
The government has established a new Children and Families Agency and increased spending on family support measures to 3.6 trillion yen through 2028. This includes expanded childcare benefits, improved parental leave benefits, and more stipends. Funding will be provided through higher health insurance fees, tax reforms, and budget adjustments.
A central element of the strategy is improving the balance between work and family life. The "Womenomics" policy introduced under Prime Minister Shinzō Abe aims to expand childcare places, improve maternity protection regulations, and provide financial incentives for returning to work after parental leave. These measures are beginning to show results: By 2023, over 30 million women were employed—a record number.
What labor market reforms has Japan introduced?
To combat the labor shortage, Japan has initiated comprehensive reforms to its work culture. The work style reform, launched in 2018, introduced statutory overtime limits and promoted flexible working arrangements such as working from home and flextime. New work models adapted to the needs of parents and caregivers have become established, particularly during the pandemic.
A key component is the extension of working life for older workers. Since 2021, companies have been permitted to offer employment opportunities up to the age of 70, and from 2025, they are legally obligated to allow all employees to continue working until at least age 65. This measure is already having an impact: In 2023, 9.14 million older people were employed—a new record high.
The government also promotes the increased integration of women into the labor market. Large companies are required to develop women's advancement plans, and financial incentives have been created for returning to work after starting a family. The labor force participation rate of women rose from 37 percent in the mid-1970s to 45.5 percent in 2024.
Is Japan opening up to foreign workers?
Japan, which is traditionally proud of its social homogeneity
and pursues a very restrictive immigration policy, has cautiously opened up to foreign migrant workers in light of the acute labor shortage. In 2018, the government passed a new law allowing a sharp increase in the number of low-skilled "guest workers."
The new system provides for various visa categories. The first visa type allows foreign nationals with basic Japanese and certain job skills to work for up to five years in 14 sectors, including construction, agriculture, and elderly care. However, family members are not permitted. The government estimates that approximately 345,000 to 820,000 people will receive these visas over the next five years.
Nevertheless, immigration policy remains restrictive. Foreign workers receive, on average, about 30 percent less pay than their Japanese counterparts. Fearing losing their right to reside, many allow themselves to be exploited, and career advancement is usually impossible. The Japanese government continues to hesitate to offer foreign workers a permanent residence permit, significantly reducing its attractiveness as a destination for international skilled workers.
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Reforms instead of economic stimulus packages: A realistic plan for Japan's future
What role does technology play as a solution approach?
Japan is relying heavily on technological innovations to meet the challenges of demographic change. The country has developed a comprehensive innovation strategy that includes key technologies such as artificial intelligence, robotics, quantum computing, and 6G technology. The government is pursuing the concept of "Society 5.0" – a vision of a human-centered society that harmonizes economic progress with the solution of social problems.
Robotics is seen as a particularly promising area of care. Japan has been developing care robots for more than two decades and has already invested well over $300 million in their research and development. The government estimates that the market for care robots could reach a volume of $3.9 billion by 2030.
However, practical successes have been limited so far. A large survey of more than 9,000 elderly care facilities in 2019 found that only about 10 percent had introduced a care robot. For home care, the proportion was as low as 2 percent. Many purchased robots are used only for a short time and then put away because they require care of their own – they need to be moved, maintained, cleaned, and operated.
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What are the limitations of technological solutions?
Although Japan is considered a technological showcase, the practical implementation of care robots presents a sobering reality. The digitalization of care is still in its infancy in Japan, too. The causes are similar in both countries: organizational barriers, acceptance issues, financing difficulties, and a lack of knowledge about practical technical solutions.
The range of care robots is mainly limited to mobility and transfer aids, telepresence robotics, and emotional robots such as the well-known robot seal "Paro." While these can support certain tasks, they do not replace the human attention that is central to care. Many care robots require additional effort for operation and maintenance rather than reducing the workload.
Another problem is the lack of integration into existing workflows. Technical aids can only be successful if they are seamlessly integrated into everyday care and actually provide relief. This requires not only technical perfection but also comprehensive training and adjustments to organizational structures.
How is Japan dealing with the sovereign debt crisis?
The Japanese government is attempting to tackle the sovereign debt crisis with a multi-dimensional strategy, but faces a fundamental dilemma. On the one hand, the economic weakness requires further stimulus packages, while on the other, every new expenditure exacerbates the already critical debt situation.
Prime Minister Shigeru Ishiba announced a 39 trillion yen (approximately €239 billion) economic stimulus package in October 2024. This package again provides for subsidies for electricity, gas, and gasoline prices, as well as cash payments to low-income households. In addition, the tax-exempt income threshold is to be raised, which, however, will reduce tax revenues by a further 7 to 8 trillion yen annually.
The Bank of Japan is in a particularly difficult situation. Inflation above 3 percent would normally require significant interest rate hikes, but every increase places an additional burden on the heavily indebted country. The central bank is therefore proceeding very cautiously and plans to raise the key interest rate only to 1.0 percent by the end of 2025 – still extremely low by international standards.
What international risks arise from Japan's problems?
Japan's problems have far-reaching implications for the global economy. The so-called "yen carry trade," in particular, poses systemic risks to global financial markets. International investors have been borrowing cheap yen for years to invest their capital in higher-yielding investments around the world—from stocks like Nvidia and Amazon to real estate.
With rising interest rates in Japan, this strategy is becoming increasingly expensive. Investors are forced to withdraw capital from international markets to repay their yen-denominated loans, leading to liquidity outflows and price declines. Estimates suggest that between $8 and $12 trillion could be directly affected by this development.
Trade conflicts with the US are further exacerbating the problems. As the world's third-largest economy, Japan is an important trading partner for many countries. US tariffs of 15 percent on Japanese goods not only burden Japan's export economy but also have the potential to disrupt global supply chains.
Are the solutions proposed so far successful?
The results of reform efforts so far are mixed. Some measures are showing positive effects: the female employment rate has increased, more older people are staying in the workforce longer, and the work culture is gradually becoming more flexible. The opening to foreign workers has begun, although it is still very limited.
Nevertheless, progress is insufficient compared to the magnitude of the challenges. Despite all efforts, the birth rate continues to decline, reaching new record lows year after year. The expected labor gap is over 800,000 jobs, even if all planned reforms are implemented. Polls show that the majority of the population does not believe that government measures will reverse the trend.
Technological solutions have not yet delivered the hoped-for breakthrough. Care robots are being deployed only slowly, and their practical effectiveness is limited. The digitalization of the world of work is progressing, but it cannot fully compensate for the fundamental labor shortage.
What structural reforms are necessary?
Experts agree that Japan needs far-reaching structural reforms to solve its problems in the long term. Current measures often address only the symptoms, not the root causes.
A fundamental reform of immigration policy is essential. Japan will have no choice but to increase the acceptance of immigrants and integrate them into society. The current approach, with temporary visas and limited family reunification, is too restrictive to meet actual needs. An open immigration system modeled on Canada or Australia would be necessary, but is facing considerable social resistance.
The work culture must undergo fundamental change. Traditionally long working hours, limited flexibility, and poor work-life balance must be overcome. This requires not only legal changes, but also a cultural shift in corporate management and society as a whole.
How must economic policy change?
Economic policy faces the difficult task of simultaneously promoting growth and restructuring public finances. The current strategy of continually launching new economic stimulus packages is reaching its limits. Instead, sustainable growth stimuli through structural reforms and productivity improvements are needed.
Fiscal policy must be consolidated in the medium term, even if this is painful in the short term. The government debt ratio of over 240 percent of GDP is unsustainable, especially with rising interest rates. Gradual fiscal consolidation is necessary to maintain market confidence and secure future room for maneuver.
At the same time, spending must become more efficient. Instead of continually distributing new subsidies and transfer payments, investments in education, research, and infrastructure should be prioritized. The government's innovation strategy points the way, but its implementation must be more consistent.
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What role does international cooperation play?
Japan cannot solve its problems in isolation. The challenges of demographic change, the sovereign debt crisis, and labor shortages require international cooperation and the exchange of best practices.
Cooperation with other developed countries facing similar problems is particularly important. Germany, Italy, and other European countries face similar demographic challenges. An intensive exchange of experiences on successful reforms and solutions could benefit all parties involved.
Cooperation with ASEAN countries is crucial to solving the labor shortage. Many Southeast Asian countries have young, well-educated populations that could work in Japan. However, this requires fair working conditions, decent pay, and integration prospects.
What does this mean for Japan's future?
Japan is at a turning point in its history. The demographic, economic, and social challenges are so great that they threaten its survival as a modern industrial society. Without far-reaching reforms, a further spiral of population decline, economic weakness, and social instability threatens.
At the same time, the crisis also offers opportunities for sustainable change. Labor shortages are forcing companies to rethink traditional structures and develop innovative solutions. The need to use resources more efficiently can lead to productivity gains and technological advances.
The next few years will be crucial for Japan's future. If the necessary reforms are implemented and social acceptance for change is established, Japan can become a model for other countries facing similar challenges. If the reforms fail, further economic and social decline threatens, which will also have international repercussions.
Time is running out, and the problems are growing with each passing year. Japan must act now to secure its future as a prosperous and stable country. The solutions are known, but their implementation requires political courage and social consensus—both resources that are scarce in the current situation.
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