Gray Menace

Japan's relationship with the United States over the past half-century has been one of remarkable resilience, even through the end of the Cold War and the emergence of new security threats in Northeast Asia. During his February meeting with Japanese Prime Minister Taro Aso, U.S. President Barack Obama emphasized the importance of the alliance by declaring it "the cornerstone of security in East Asia." But a change is occurring in Japan that could rock the foundation of this happy partnership, something far more dangerous for the United States than the prospect of an opposition victory in the upcoming general election: Japan is getting old.

In fact, Japan is the grayest country in the world, with 21.5 percent of its population 65 or over. Not only is the Japanese population aging, it's also shrinking, from 127 million today to a projected 89 million by 2055, the result of a plunging fertility rate. This unfortunate combination is causing the country to lose its edge and dynamism. Older workers are less innovative; older, more "mature" markets attract less investment. Older populations live off savings, rather than generating new capital. And, as the number of working-age citizens diminishes, pension funds will be exhausted and tax revenues and government budgets will be squeezed.

The demographic transformation will in effect become a guillotine, cutting off policy options as Japan tries to deal with the needs of an elderly population. For example, Japan will be more likely to prioritize healthcare than international security. Older societies are typically more risk-averse, and Japanese -- "reluctant realists" at the best of times -- will be increasingly unwilling to put their most precious resource, their young, in harm's way.

This shift poses serious questions for the United States and its increasingly important relationship with Asia. The U.S.-Japan alliance has moved steadily forward over the last decade, with Japan assuming a higher profile when it comes to regional security. But we have probably seen the high-water mark of Japan's international security activities. Even though the region is increasingly tense, Japanese defense budgets have actually declined in recent years (and Japan continues to cap defense spending at 1 percent of GDP) -- a fact that could put U.S. interests in Asia at risk.

Financially, too, considering that Japan's savings has bankrolled much of U.S. spending in recent decades, the country's increasingly elderly population is going to hit the American empire where it hurts. U.S. trade negotiators have long targeted Japan's trade surplus with the United States, but those funds have been recycled back to America to suppress the value of the yen, finance consumption of Japanese-made goods (and support employment), and help the United States cover its steadily expanding government deficits. Until late 2008, Japan was the number one holder of U.S. Treasury bills. (China has overtaken Japan, but as of February 2009, Japan still held $662 billion in T-bills, putting it just behind China.)

An aging Japan will no longer be able to recycle those surpluses. More precisely, an aging Japan won't have those surpluses: Its trade accounts will fall into deficit, and funds that do exist will be badly needed at home. This process is already underway as the country's savings rate declines. According to estimates by the consulting firm McKinsey, the total savings rate in Japan is projected to slide to 0.2 percent by 2024.

Unfortunately, Japan is merely the leading edge of a demographic tsunami in Northeast Asia. Aging, the rise of a middle class, and the desire to stimulate domestic demand more generally will transform trans-Pacific balances.

As Japan grapples with its demographic transformation, China and South Korea will look to fill the gap. (In fact, both countries also face demographic trajectories similar to Japan's, but they have more effective options to deal with this shift. China can lift its one-child policy or draw on its considerable diaspora; Korea has opened the door to foreign brides and there is always the prospect of an influx of youth from unification.) Japan has purchased considerable influence in the region by virtue of its foreign investment, but those days are over, and it's still unclear what the balance of power will look like in the future.

In any event, however, there are some ways for Japan -- and the United States -- to make the most of its aging problem. To begin, Japan must embrace the prospects for diplomatic progress that its "golden years" could bring. As Japan's population grows older, fears of the country's remilitarization will diminish, which should create a thaw that could facilitate deeper integration within Asia and the forging of a Tokyo-Beijing axis, similar to France and Germany's in the European Union. Japan's weakening could actually be a positive force in the region: A country with diminished resources is more inclined to reach out to other nations for help in dealing with shared problems. (Of course, this will require some far-sighted diplomacy by Seoul and Beijing; they could just as easily be tempted to settle old scores and grievances with a weakened Japan.)

The United States has a lot to do as well. To start with, Washington needs to develop a new paradigm for its alliance with Japan. Japan remains a rich country, with much to contribute -- if it chooses to do so. So Washington must encourage Japan to keep an eye on the horizon and shoulder some clearly defined international responsibilities, while it still has the capacity. Quid pro quos are out: Both countries should think in terms of public goods that serve regional and larger interests. That could mean the provision of human capital throughout the region to institutionalize good governance or sustainable development, or reinvigorated diplomacy on economic or trade issues. Similarly, the alliance must diversify and focus less on military issues and more on security broadly defined, whether this is fighting disease, protecting critical infrastructure, or stemming the spread of weapons of mass destruction, to name but three areas where Japan can make significant contributions.

Together, the United States and Japan need to promote the development and strengthening of regional institutions. There is a tendency in both countries to see East Asian integration as a threat or challenge to U.S. relations with Asia and ties to Japan. That too is short-sighted. Multilateralism and bilateralism should not be seen as exclusive options. More effective multilateralism will deepen ties among nations, contribute to regional stability, and facilitate problem-solving. The process should begin now, while Japan still has more leverage and influence over the development of institutions and norms.

Of course, keeping Asia on track as Japan heads into this demographic decline will be a difficult task. The combination of a rising China, a shrinking Japan, and a more coherent Asia will fundamentally alter the dynamics of U.S. engagement with Japan. Tokyo will continue to be America's ally and partner even as the country ages and its interests evolve -- but only if both countries begin planning for that future today.