The increasing number of old people will lead to labor force shortage and hold back Japan's economic development, said a government report Friday.

"The aging and declining population alone has negative effects on macroeconomic growth," said an annual report on the Japanese economy and public finance for fiscal 2003.

But whether the nation can overcome this downward pressure will "also depend much on policy efforts," the report said.

The report said efforts should be made to allow women and senior citizens with working desire to fill up the vacancy of labor force.

At the same time, Japan should raise its productivity and add investment in research and development to promote technology innovation and in education to boost the skills of the labor force, the reported pointed out.

In the long-run, the nation would also have to lure foreign capital into the country to make up for the expected shortage of domestic savings linked to the aging population, it said.

Japan's population is aging dramatically with the percentage of those over 65 years old standing at 18.5 percent as of October, 2002, and expected to rise to 28.7 percent in 2025.

The elderly put a tremendous burden on the government, and Prime Minister Junichiro Koizumi has urged to cut governmental share in pension and medical care.

Health, Labor and Welfare Minister Chikara Sakaguchi suggested Tuesday that the government will raise the mandatory retirement age at companies from 60 to 65 in a bid to hike the eligible age for corporate employees to start receiving pensions.

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