Reconsidering Aging and Financial Markets in East Asia

Amid the concern over detrimental effects of rapid aging in East Asia, estimations of the impacts of the region’s demography on macroeconomic variables have been conducted since the early 2000s. A recent example is IMF (2017), which estimated several macroeconomic variables using panel data of demographic variables and a number of newly introduced explanatory variables, such as “financial openness” and expected “aging speed.” IMF (2017), however, defines the range of ages in the “working age population” differently from those commonly used. In this chapter, we estimate macroeconomic and financial variables by using explanatory variables similar to those of IMF (2017), but with commonly used demographic definitions, and with an increased number of countries during extended periods. The results of the estimations are different from those of IMF (2017) but similar to those of previous literature. “Youth dependency ratio,” “old-age dependency ratio” and “expected aging speed” have significant impacts on interest rates and stock return, the impacts of which, however, can be mitigated by increased “financial openness.” Empirically revealed relationships between “aging speed” and savings as well as financial variables is a “conundrum” which is not consistent with the Life Cycle/Permanent Income hypothesis, but can be explained using “behavioral economics.” The resulting shortage of savings after retirement can be rectified by introducing “Saving More Tomorrow” type pension plans which incorporate behavioral economics and are widely available in the United States. Similar plans may provide solutions against the expected shortage of savings in East Asia, including Japan.