During the next 20 years, the financial wealth of Japanese households will stop growing and begin to decline, leaving them with $8 trillion less than they would have if historical growth rates persisted, according to new research from the McKinsey Global Institute.¹ (The full report, The Demographic Deficit: How Aging Populations Will Reduce Global Wealth, is available free of charge online at the MGI Web site.) Wealth will decline not only in the aggregate but also for average Japanese households, which will be no wealthier in 2024 than they were in 1997. The continual improvement in living standards the Japanese have enjoyed during the past half century will come to an end.

The heart of the problem, as many observers have noted, is the fact that Japan is getting much older. By 2024, more than a third of the population will be over age 65—one of the developed world's largest proportions of elderly citizens. Retired households will outnumber households in their prime saving years, so savings rates will fall drastically. Equally important but less noticed is the fact that younger Japanese people are saving much less than their elders did. Exacerbating both of these trends are the low...