The fact that Japan’s population will continue to decline is no surprise to most Asia watchers. However, the magnitude of this decline and its associated consequences are not limited merely to Japan’s domestic economy. According to Japanese government statistics, the country’s population is slated to decline by a third between now and 2060 – a remarkable drop for the world’s third-largest economy. A Japanese census has forecast that, under current conditions, the country’s population will fall from its current level of 128 million to 87 million by 2060. To put that in perspective Japan would fall from being the country with the tenth-largest population in the world in 2010 to barely in the top twenty within half a century.

Fueling this decline is a range of factors including the one of the world’s lowest birth rates, a rapidly aging senior population and an inability to achieve growth through other means that remains controversial in Japan (such as increased immigration or structural changes to incentivize women to have more children). The principal challenges emanating from this demographic reality are economic. Japan’s share of the global economic pie will continue to dwindle over the coming years despite its significant market size. This will align with continued growth by China and other emerging economies in Asia, such as India, Vietnam and Indonesia.

The fallout from these economic consequences have the potential to be stark for Japan’s geopolitical stature – both regionally and globally. As a recent report from the National Bureau of Asian Research (NBR) notes, “Japan’s aging and shrinking population is a cause for concern in both Japan and the Asia-Pacific region as a whole.” As Japan’s economic fortunes continue to wane, there is a greater possibility that it will be challenged more vigorously by its neighbors – namely China, Russia and South Korea – who may feel emboldened to push Tokyo harder on their respective territorial rows.

But Japan’s geopolitical position – along with its alliance with the U.S. – is not in danger of any imminent makeover. The effects of these projected demographic shifts will likely be gradual and could equate to a more benign slow decline. Yet even under this scenario, Japan’s security infrastructure will face significant hurdles as its population and real GDP numbers diminish. While Japan’s defense spending has been traditionally capped at 1 percent of its GDP due to its security umbrella from Washington, the current threat environment in East Asia has necessitated a new approach.

Indeed, Japan’s Prime Minister Shinzo Abe has noticed this deficit and called for a 3 percent increase in defense spending for 2014. Much of this increase will go to improving surveillance capabilities and the Self Defense Force’s (SDF) ability to protect Japan’s administration of the Senkaku islands. Japan’s enhanced emphasis on providing new defense spending is a necessary but not sufficient approach and is unlikely to alter China’s calculus in the East China Sea where it sends vessels on a daily basis around the disputed isles. And this is a trend not likely to ebb in the short-medium term. As Richard Katz aptly noted in a recent conference on Japan’s demographics, “It’s becoming a rougher neighborhood, and I think the political support for coast guard and ballistic missile defense is going to increase rather than decrease. And, if you want to integrate China as a responsible stakeholder, it’s much harder to do that without a vibrant Japan. Japan needs to be part of the hub and not let China alone become the hub.”

This is where Japan’s demographic pressures are likely to hit hard. As there is greater demand to pay for the country’s burgeoning senior population, Japan’s leaders will need to make tough choices and further squeeze government spending. While Japan’s defense spending is minimal in relative terms, it is still significant in real terms. According to figures from SIPRI, Japan’s defense spending in 2013 was nearly $60 billion USD. The sophistication of the SDF’s capabilities and technologies – especially in its navy – has relied upon this significant amount of real expenditure. As a result, any prolonged economic contraction will gradually erode the ability of the SDF to respond to future challenges in the region. In other words, regional threat perceptions and future procurement affordability will likely continue to follow divergent tracks.

These future pressures will also necessitate an even stronger dependence on the U.S.-Japan alliance to protect Tokyo’s security interests. The Abe administration has clearly indicated this imperative through a host of senior-level exchanges with Washington on security and defense issues, including the U.S.-Japan Security Consultative Committee in which defense and foreign ministers from both sides met earlier this month in Tokyo. The most recent “2+2” meeting resulted in a commitment for Japan to pay a third of the cost of relocating U.S. Marines from Okinawa to Guam. Meanwhile, the U.S. committed to deploying P-8 maritime patrol aircraft as well as F-35B combat aircraft to Japan in order to reassure Tokyo of its extended deterrence.

Mitigating the effects of Japan’s demographic trends will therefore be crucial not only for the competitiveness of its economy, but also for its geopolitical role in East Asia. The solution will require an innovative and open look at key drivers such as work productivity, retirement age, immigration of skilled workers and the role of women in the workplace.

J. Berkshire Miller is a SPF fellow and co-chair of the Japan-Korea Working Group with the Pacific Forum CSIS. Follow him on twitter @jbmllr.