TOKYO (AFP) - Japan's population has shrunk for the third year running, with the elderly making up a quarter of the total for the first time, government data showed on Tuesday.

The number of people in the world's third largest economy dropped by 0.17 per cent or 217,000 people, to 127,298,000 as of October 1 last year, the data said. This figure includes long-staying foreigners.

The number of people aged 65 or over rose by 1.1 million to 31.9 million, accounting for 25.1 per cent of the population, it said.

With its low birthrate and long life expectancy, Japan is rapidly greying and already has one of the world's highest proportions of elderly people.

The ageing population is a headache for policymakers who are faced with trying to ensure an ever-dwindling pool of workers can pay for the growing number of pensioners.

The country has very little immigration. Any suggestion of opening its borders to young workers who could help plug the population gap provokes strong reactions among the public.

The proportion of people aged 65 or over is forecast to reach nearly 40 per cent of the population in 2060, the government has warned.