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The inhibitory effect of Japan's shrinking labor force on financial development: A mediation analysis based on the innovation channel

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  • Wang, Yongdong
  • Zhao, Liangliang

Abstract

This study aims to explore the impact of labor force contraction on financial development and its underlying mechanisms. Through empirical analysis utilizing monthly time series data from January 1984 to May 2025, the research tests the following hypotheses: First, labor force contraction has a significant inhibitory effect on financial development; second, the innovation channel serves as a mediating factor between labor force contraction and financial development; and finally, the suppressive effect of labor force contraction on financial development demonstrates heterogeneity across periods with different population levels. By analyzing the mediating effect of the innovation channel, this study reveals how labor force contraction further constrains the development of financial markets by affecting innovative activities. It also examines the moderating role of population-level differences in the relationship between labor force contraction and financial development. The findings have important theoretical and practical implications, providing valuable references for policymakers as they respond to economic challenges posed by population aging and promote the healthy development of financial markets.

Suggested Citation

  • Wang, Yongdong & Zhao, Liangliang, 2026. "The inhibitory effect of Japan's shrinking labor force on financial development: A mediation analysis based on the innovation channel," Finance Research Letters, Elsevier, vol. 88(C).
    • Handle: RePEc:eee:finlet:v:88:y:2026:i:c:s1544612325023128
    DOI: 10.1016/j.frl.2025.109063
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