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Japan: No longer Asia's fastest-aging nation?

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PATRICK LIN | AFP | Getty Images

Taiwan is set to surpass Japan as Asia's fastest aging nation this decade, experts warn, as a dwindling labor force poses a structural challenge to economic growth.

"An imminent issue Taiwan will face is population aging, it seems the aging trend is unfolding faster than forecasted," Societe Generale economist Claire Huang said in a recent note.

Huang says the population of working-age residents, or those between 15 and 64 years of age, will shrink 7.3 percent by 2025, above the 7.2 percent contraction expected for Japan. While Taiwan's figure seems alarming, it comes as no surprise; Huang notes that growth was barely above zero in 2014 after hovering below 1 percent for most of the past decade.

In a report last year, HSBC noted that the East Asian 'tigers' (South Korea, Hong Kong, Taiwan and Singapore) were expected to age at rates even quicker than that of Japan.

Studies of other population metrics in Taiwan also reveal worrisome trends. Total fertility rates, the average number of children born per woman, were the third lowest in the world last year, according to the CIA World Factbook, 14 places below Japan.

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Taiwan's National Development Council predicts the country will achieve 'aged society' status by 2018, which requires 14 percent of the population to be aged 65 or older. By 2025, the council expects the elderly to exceed the 20 percent mark, which will see Taiwan become a 'super-aged society.'

Hit to economic growth

If Taiwan's working-age population continues to decline as per Societe Generale's model, economic growth is set to drop 0.9 percentage points per year, the bank warned. Government forecasts are for 3.5 percent gross domestic product (GDP) growth this year, which means growth will slide to 2.6 percent by 2025, according to Huang's calculations.

"Taiwan's demographic profile is not advantageous for faster economic growth," said William Wilson, senior research fellow at American think tank The Heritage Foundation, in a 2014 report.

In order for Taiwan to sustain a growth rate around 3 percent, Societe Generale says the government must boost immigration and improve productivity to compensate for the loss from a declining working-age population.

What's worse than aging?

According to Barclays, there's a far more pressing challenge to Taiwan's economy than aging.

"Aging has been around for some time. While its effects on the economy are clear, it plays out slowly so the government will have enough time to react," said Wai Ho Leung, the bank's senior economist.

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"More importantly, you have young Taiwanese, the most productive part of the workforce, leaving to mainland China," he continued, referring to a phenomenon known as brain drain. Barclays estimates that more than 1 million Taiwanese live in China, or roughly 5 percent of Taiwan's population.

"The government needs to lure youth back by creating more opportunities to empower them, especially in the manufacturing sector," Leung said.