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Japan’s population shrank by its largest amount on record in 2014. Roughly 1.001 million people were born and 1.269 million people died last year, leaving the country with 268,000 fewer people overall.

Japan’s declining population has a powerful impact on its economic situation, and not for the better. An aging population leaves the country with fewer workers and more dependents. And conventional wisdom says aging leads to slower economic growth and more deflationary forces, both of which make it more difficult for Japan to chip away at the substantial debt burden from its economic crisis at the beginning of the 1990s.


The data above, drawn from a recent working paper from Tokyo’s Waseda University, shows just how bad Japan has been at forecasting its fertility rate since 1965. Government projections have been almost comically wrong, as the government repeatedly interpreted the sharp decrease in the fertility rate as a temporary dip rather than a sustained trend.

The paper argues that the effects of an aging population on deflation are more complicated than typically thought – that aging is deflationary when caused by an increase in longevity but inflationary when caused by a decline in birth rate. Overall, Japan's aging population generated deflation of 0.6 percentage points annually over the past 40 years, the authors say.