Economic growth

Japan's Working-Age Population Has Shrunk by 16% Since 1995. Robots Are Filling the Gap.

The Peoples Economy

01 Jun 2026 — 2 min read

Japan's demographic situation is no longer approaching. It is here. The country's working-age population has been in constant decline, falling 16% from a peak of 87.3 million in 1995 to 73.7 million in 2024. The old-age dependency ratio more than doubled from 21% to 49% over the same period. By 2060, the working-age population is projected to contract by a further 31% from its 2023 level.

The consequences for the labour market are already severe. As of the second quarter of 2025, the Bank of Japan's Tankan survey placed the diffusion index for employment conditions at negative 35 across all industries, one of the lowest readings in three decades and a signal of widespread, structural labour shortages across sectors.

Japan's response has been a combination of extending workforce participation among older adults and accelerating automation. The proportion of employed individuals aged 65 and over has increased for 20 consecutive years since 2004, placing Japan above the OECD average. As of 2022, 25.2% of Japanese people aged 65 and over were still working, the second-highest rate among major economies, following South Korea's 37.3%.

The Bank of Japan projects approximately 1% GDP expansion in both 2025 and 2026. Labour reforms introduced under the Work Style Reform law have helped improve productivity through digitalisation. The services sector, which accounts for about 70% of GDP, continues to absorb much of the elderly workforce.

The IMF has identified a critical constraint in Japan's automation response. Japanese workers face lower exposure to AI compared to counterparts in other advanced economies, limiting AI's potential to compensate for the labour shortage. Sectors most affected by population aging tend to report higher shortages five to seven years later, meaning the problem being felt today was seeded in demographic trends from the early 2010s.

South Korea faces a near-identical challenge. Its total fertility rate hit a record low of 0.72 in 2023, the lowest of any OECD country. The silver economy, defined as economic activity generated by older populations and the industries serving them, is simultaneously becoming one of the most significant growth markets in Asia and a structural drag on the labour productivity that drives it.

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