30 per cent drop in population will see ballooning medical and pension costs
Elderly to increase by 10 million in 2055, making up 40 per cent of total population
Working population will stand at 46 million or slighty above 50 per cent
The downward revision of the population count is based on the national birth rate staying at the current level of 1.26 children per woman, the report said.
Japan's birth rate hit a record low in 2005 with 1.26 babies per woman, making it one of the most ageing countries in the world.
The proportion of those aged over 65 is expected to double by 2055 to 40 per cent of the total population from the present 26 million people.
Those in the 15 to 64 age bracket are expected to drop from 36 million, or 66 per cent of the population, to 46 million.
This means just over 50 per cent of Japan's population will be in the workforce in 2055.
Commenting on their findings the report's authors said it was "imperative that we pursue effective measures to combat the falling birth rate now."
Shinzo Abe, the Japanese prime minister, sought to allay fears over future pension payouts but expressed concern over the current demographic trend.
"It's not as if the pension system will collapse," he said. "We need to do whatever we can to implement measures to resolve the falling birth rate to prevent the rate from going any lower."
Japan unveiled a draft budget on Wednesday that boosted spending on childcare support and day-care centres.