Aggregate economic growth figures do not matter as much when the population is shrinking. Lower aggregate growth is consistent with rising per capita income as population declines. Japan is in unchartered territory in its super demographic transition that has already seen population shrink by one million since 2008. Its working age population peaked in the late 1990s, though product per worker has continued to rise respectably. More importantly, the population is ageing rapidly. Adult diapers started to outsell infant nappies a few years ago, and at roughly 68,000 in 2016, the number of people over 100 years of age is growing. In 1950 there were 12.1 people of working age for every elderly person. In 2016 that ratio had shrunk to 2.2,and by 2065 it will be close to one to one.

Population ageing and population shrinking are both accelerating. That will put more pressure on healthcare, pension funding and aged care systems.

The government budget is already under pressure with an historically unprecedented gross government debt to GDP ratio of over 240 per cent. The country with the next highest debt ratio is Greece, at 180 per cent debt to GDP. It is over 100 per cent in the United States and around 40 per cent in Australia. That Japan has not experienced a debt crisis seems remarkable, and many have lost fortunes betting against the Japanese government bonds that finance that debt. Debt continues to grow as the government spends more than it receives in revenues. Japan’s government debt is sustainable so long as the market thinks it is but there are no easy or comfortable exit strategies.

Despite the looming challenges, Masahiko Takeda opens this week’s lead essay with the reassurance that the ‘Japanese economy is in very good shape’ and that ‘everything seems just right’ — the Goldilocks economy. The unemployment rate is at a 22 year low of 2.8 per cent, corporate profits are the highest in history and the stock market is the highest it has been since the bubble burst 26 years ago.

The economy is ‘experiencing its second-longest period of continuous economic growth since the end of World War II’ — soon to overtake the longest streak which was in the early 2000s. Takeda explains that ‘these strong indicators do not mean the economy is overheated’ since inflation is ‘barely positive’. The low and even negative interest rate means that servicing government debt is manageable.

For the current good news Prime Minister Abe deserves credit. His Abenomics reform package, which was launched almost 4 years ago, has shifted the economy around. He appointed Bank of Japan Governor Kuroda with a strong mandate to defeat deflation (a phenomenon where prices fall from year to year and consumption and investment stall). Mr Abe managed to raise the consumption tax from 5 to 8 per cent to address the government’s finances but has delayed raising it further to the promised 10 per cent. He has done perhaps just enough to lift the productive capacity of the economy, on structural or supply-side reforms — for now.

Many inside and outside of Japan have been disappointed at Japan’s failure to tackle difficult reforms Abe promised and that Japan so obviously needs. That would require expending political capital and taking on the vested interests in society and within his own government that resist them. Their agenda is well known and accepted. Without action the current good news story cannot last in the face of Japan’s demographic time bomb and government’s fiscal position.

The current rosy economic indicators hide some of the challenges that are apparent to anyone living in Japan.

Raising the retirement age and increasing female labour force participation will buy Japan time as it deals with the population shrinking and the ageing problem. Mr Abe has succeeded in boosting female labour force participation, which until recently lagged behind the rest of the world. But many new female jobs are in ‘non-regular’ work that do not provide job security, benefits or investment in skill development. Career-track ‘regular’ employment is dominated by men or unmarried women.

For Japanese women, the choice between having children and a real career is particularly tough. The shortage of accessible childcare places needs to be addressed (with a shrinking cohort of children), and distortions in the labour market and tax system that discourage women from full-time secure work need to be fixed. The Prime Minister’s mandated quota of 30 per cent women for management positions has been a predictable failure in resolving these problems.

There are now one million foreign workers in Japan — a number that continues to grow even though migration is not ostensibly encouraged. Mr Abe extended the guest worker scheme from three to five years and made that renewable. He may be ahead of the public in pushing de facto immigration, but to sustain larger numbers to slow population shrinking he needs to carry the argument for boosting migration to the public else he risks jeopardising Japan’s famous social harmony. Third-generation Koreans and Chinese still don’t have the same rights as ethnic Japanese. Addressing the demographic problem in part through immigration will require Japan to treat immigrants equally in law and in practice and set up institutions that facilitate the assimilation of newly arrived people.

Foreign trade and economic policy has also deeply disappointed, despite the flurry of Japanese ‘leadership’ in response to the threat that the Trump administration poses to the international trade regime. The Trans-Pacific Partnership might have been embraced as a new force for gaiatsu, or foreign pressure, to liberalise the lagging agricultural and protected services sectors, but it never was embraced wholeheartedly. Reluctant trade concessions were a second-order consideration to the security symbolism of the agreement before Trump abandoned it. TPP-11 is a different game, which like the recent EU agreement and Japan’s new commitment to the RCEP deal in East Asia, marks the Abe administration’s new defensive tactical play, if not clear strategic intention.

Things may be looking up for Japan and, as the Tokyo Olympics approach in 2020 that’s likely to continue. Mr Abe has done just enough to stabilise the shrinking ship — much more than can be said of his predecessors. But the question is whether Japan’s doing just enough will avoid another hard crash back to reality at the beginning of the next decade, like it did three decades ago in 1991.

The EAF Editorial Board is comprised of Peter Drysdale, Shiro Armstrong, Ben Ascione, Amy King, Liam Gammon, Jillian Mowbray-Tsutsumi and Ben Hillman, and is located in the Crawford School of Public Policy in the ANU College of Asia and the Pacific.

This article is part of an EAF special feature series on 2017 in review and the year ahead.