The impact of Japan's declining population on the life insurance sector is expected to be only mildly negative in the next 10 years, given the gradual pace of this change, says Moody's Japan K K in a new report.

The report outlines how Japan’s declining and ageing population is posing challenges to the country’s insurers and banks, with in particular the viability of small banks at risk.

Life insurers also have the option to change their product mix, for example by increasing their focus on medical products, although competition in these alternative segments has been intensifying, says the report.

“On the insurance side, both life insurance and property and casualty (P&C) insurers will see demand for their core products decline, but both have access to other potential drivers of growth, including expansion overseas,” said Mr Soichiro Makimoto, a Moody’s vice president and senior analyst.

While P&C insurers are facing declining demand for consumer-line products, this should be offset by healthy growth in corporate lines, particularly speciality products, and in their overseas businesses.

Japan’s government projects that the population will decline by 16% between 2017 and 2045, with the proportion of people aged over 65 to increase to 37% from 28%.

Analysts believe this demographic shift poses challenges for the traditional business model of the banks, as weakening economic activity is reducing credit demand and creating excess liquidity in the system; further exacerbated by the low interest rates and margin pressure that have resulted from weak economic growth.

Separately, according to a report, “World Population Prospects 2019: Highlights“, released by the Population Division of the Department of Economic and Social Affairs of the United Nations Secretariat, Japan's population is expected to plunge from an estimated 126.9m currently to 120.8m in 2030 and to 105.8m in 2050.