Why people in Japan are being paid to have babies

Japan's nationwide fertility rate just hit its highest level in 21 years.

The total rate increased to 1.46 in 2015, slightly up from the previous rate of 1.42 in 2014, according to the health ministry.

The biggest contribution to the increase came from women 30 to 34, according to Bloomberg.

This is no doubt a good sign for a country struggling with a looming demographic crisis.

But what's particularly interesting about this spike in fertility is that there was a correlation with cash incentives for new parents.

Christopher Wood, author of CLSA's weekly Greed & Fear newsletter, pointed out in his latest installment that the highest fertility rate among Tokyo's wards was in the Minato Ward, where parents get one-time cash payouts of up to 180,000 yen — about $1,684 — a birth.

Moreover, he noted that the biggest improvement in fertility in the country was in a town called Ama on the island of Nakanoshima, which has a "leveraged scheme to incentivize mating": parents get 100,000 yen (about $940) for the first baby, but get 1 million yen (about $9,400) for the fourth kid. The town's fertility rate bumped up to 1.80 from 1.66 between 2014 and 2015.

Wrote Wood in the note:

This fits a point made by GREED & fear before, namely that the best way to deal with Japan's demographic issue is via financial incentives, with ¥10 million per child seeming to [us] about the minimum level of incentive required in central Tokyo given the costs of parenthood, a reality [we are] well aware of.

Notably, some economists have argued that women who lived in developed economies are dis-incentivized to reproduce precisely because having kids is very expensive. Or, another possibility here, as o n e of my economics professors once put it a few years back: "Why would a woman choose to have another kid that costs $250,000 a year when she can instead go work in finance and rake in $1 million a year?"

So Wood's ideas are quite interesting: It appears that cash incentives, at least somewhat, address the whole issue of not having kids because they're too expensive.

Wood added in his note:

In the end nothing can detract from the power of financial incentives. Just as higher minimum wages will encourage the acceleration of robot technology, the provision of a meaningful capital sum should encourage child rearing. It is certainly superior to negative rates, and also more reflationary.