This is expected. The population of all developed nations are in decline, the only way they can keep up is via immigration from under developed nations. Japan has a borderline xenophobic policy when it comes to immigrants as well as the longest expected livespan in any country, so of course their population and economy will shrink. It's probably why they invest so heavilly into automation / robots, as well as work 10-12 hr days.
My guess is the emperor has some influence over the existing (conservative) administrations and decided to keep Japanese culture distinct / 'pure'. I don't see this as racism however, they just don't want their culture to become part of a melting plot like in every other developed nation. It's only temporary anyway. Once the baby boomers die off these type of conservative values will evaporate and Japan will have a lot more immigration again. Their's just no way the 20/30 something year olds of today would ever be happy working 12 hour shifts 5.5-6 days a week until retirement like their parents do because of ideology. Immigrant workers will be the only solution.
On a slightly different note: It always shits me when people blame their economy problems on either immigration or overpopulation. But trying to sit down and explain this all to them usually causes you a lot more stress then just ignoring them.
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