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Can Japan’s Elderly Become Its Growth Engine?

Japan is the world's third largest economy and home to some of the most well-known global brands. It is also growing older faster than any other country in the world.

Nearly a quarter of its population of about 127 million is above the age of 65, and by 2060 the elderly could make up as much as 40 percent of the total.

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Japan's huge gray population is putting a strain on its public finances at a time when the country's debt is ballooning and the economy is struggling to gain momentum.

A shrinking workforce, falling exports and global economic uncertainty are all making it increasingly difficult to provide healthcare and pension support to this huge retiree population.

But it's not all gloom and doom — there is a silver lining to Japan's aging problem. The country's elderly have in recent years emerged as big spenders, even as those under 40 tighten their purse strings.

According to government data, households headed by those aged 60 or above accounted for more than 40 percent of total consumption in 2011, up from around 30 percent in 2000. This is significant for a country that has been trying to boost consumption as it battles deflation.

"We have a saying 'a grandchild has six pockets,' which means not just parents but also grandparents are willing to spend on a grandchild…We can feel it whenever we go to the toy section at the department store on weekends," said 33-year-old housewife and mother of two, Yuko Shimada, who lives in Tokyo.

Japan's older generation, traditionally viewed as savers, is now emerging as an engine of consumption that companies ranging from supermarket chains to mobile phone operators hope to tap for future earnings growth.

(Read More: Tips on Caring for Aging Parents)

"It's not as if the old people in Japan are just sitting around. They are spending, and that spending will help create jobs for younger people," said Jesper Koll, head of equity research at JP Morgan Securities, in Tokyo.

The 60-plus age group's average monthly expenditure was more than 300,000 yen last year ($3,831) compared with around 260,000 yen for those under 39, official data show.

As they grow older, Japanese tend to spend more. According to Japan's statistics bureau, those in their 60s spent 94 percent of their disposable income last year compared to 74 percent for 50-year-olds and less than 70 percent for those in their 30s and 40s.

Analysts said one reason for the increased spending among older Japanese was last year's devastating tsunami and earthquake.

"Older people looked at last year's disaster and said, 'Well you have money, you can't take it with you, so you might as well spend it,'" said Nicholas Smith, Japan strategist at CLSA in Tokyo.

Old Create New Opportunities

An increase in spending by Japan's senior citizens is creating opportunities for companies that are looking to take advantage of this market, estimated to be worth 100 trillion yen ($1.27 trillion) a year according to a report in the Wall Street Journal.

Japan's largest wireless carrier NTT DoCoMo launched a new smartphone in August targeting seniors, as people aged 60 and older account for nearly a quarter of its customers, the Tokyo Times reported. The smartphone has larger fonts and icons with simplified steps for sending email and taking pictures.

Martin Schulz, senior economist at Fujitsu Research Institute, said spending by older Japanese is helping transform strategies at more and more companies to suit the needs of an aging population.

For example, in April retailer Aeon opened its first supermarket with a range of products and services aimed specifically at older customers such as a medical center and shopping carts with magnifying glasses.

Car manufacturer Toyota in September unveiled a robot that can fetch and carry things for the elderly and disabled, while Japanese diaper manufacturer Unicharm said that sales of adult diapers in Japan exceeded those for babies for the first time last year.

The travel industry is also benefiting from increased spending by Japan's growing retiree population. According to a survey published by the Japan Association of Travel Agents in September, travel among seniors was stronger than by families, students or honeymoon couples, in the second and third quarters of the year.

A Bucketful of Experience

In addition to their spending power, the elderly in Japan can also be leveraged for their work experience. This is critical for the economy, as Japan's working age population is shrinking. The Japanese workforce, those ages 15-64, will almost halve by 2060, according to Japan's National Institute of Population and Social Security Research.

(Read More: Asia Caught Off Guard by Its Aging Population)

This makes it necessary for Japan to keep its elderly in the labor market.

Japan's retirement age has been rising gradually and will hit 65 next year, from 64 in 2010. Analysts say that workers tend to be mostly enthusiastic about continuing to work beyond the age of 60 and are open to being re-hired even though this often entails a sharp cut in pay.

Toyota and bank Sumitomo-Mitsui are among firms that have publicized their re-hiring programs. Construction equipment maker Komatsu has said it rehires 90 percent of its retirees with a 40 percent cut in salaries.

"An older population is a treasure house, not a liability, if they have accumulated useful skills and the economy is advanced enough to be able to use those skills," said CLSA's Smith.

While there is little doubt that Japan's demographic shift is dramatic and poses problems for the economy, there are reasons for optimism that cannot be overlooked amid the stark headlines.

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