Analyst Rodney Johnson delves into the disturbing demographic trends that have led Japan’s economy into multi-decade doldrums, and what factors might help solve the issues.
It wasn’t supposed to be like this.
As I learned in my MBA studies in the early 1990s, the sun was setting on the U.S. as a global economic power, just as it had on the British Empire 80 years before. The Land of the Rising Sun was ascending, and our job was to manage the decline of the U.S. as effectively as possible. There was even a book from famed McKinsey consultant Kenichi Ohmae on the subject, Triad Power.
The idea of Japan taking over the world infiltrated many parts of life. Japanese investors bought Rockefeller Center in New York, and Pebble Beach golf course in California. There was a “yellow fever” fear that, as owners of our government debt, the Japanese would effectively call the shots in Washington.
Looking back, it all sounds overblown.
Few people had Harry Dent’s insight, recognizing that while the U.S. enjoyed the early years of the greatest growth spurt in history, the Japanese were on the verge of a long, difficult economic fall.
Despite all the textbook theories and politicians’ grand plans, bureaucrats couldn’t do anything to turn the tide.
It was all about people back then.
It remains all about people today.
The Japanese had a baby boom after WWII, but it only lasted a few years. By the early 1950s, government officials demanded that citizens do their patriotic duty, limiting families to two children at most.
The goal was to keep population growth in check, focusing instead on rebuilding the country’s industrial base. It worked.
Birth rates plummeted while those in the developed world shot higher. Japan, Inc. came on with a vengeance, capturing global market share and sending wealth back home. More dollars chasing goods drove up costs, as real estate reached dizzying heights. By the early 1990s, there were bubbles in Japanese stocks, real estate, and debt. And then it all crashed.
Bubbles burst… that’s no surprise. But the Japanese economy and equity markets never recovered. They remain hobbled more than two decades later.
Some of the wounds were self-inflicted, like keeping bad debts on corporate books for a decade, hoping things would turn around. However, the bigger problem was closer to home, or to be precise, in the bedroom. They don’t have children at a rate necessary to maintain their population, much less grow.
The Japanese still suffer from exceptionally low birth rates, robbing the country of a productive working-age population, and starving the country of needed family expenditures.
One-fourth of the nation is over 65. The population of 127 million people is expected to shrink by 87 million, or 68%, by 2060. That’s just 53 years from now.
In the face of such daunting demographic challenges, there aren’t many options. One is to encourage immigration, but that’s widely frowned upon. The country has a mere 2% foreign-born population. The government recently made it easier for immigrants to work in Japan, but there are no programs of a size that would change their economic future.
In light of their cultural views, the challenge of creating economic growth has fallen to the politicians and the central bankers. The current Prime Minister, Shinzo Abe, famously announced his strategy of combining quantitative easing, introducing new money through the central bank, with regulatory reform of hiring and firing, as well as increased government spending.
The government certainly spent more, and the central bank printed more yen, but the regulatory reform never went anywhere. So far, the country’s more in debt, but still suffering low inflation or even deflation. And it’s no closer to its goals of consistent GDP growth and sustained inflation.
All of this leaves the Bank of Japan (BoJ) in a pickle.
Per economic theory, if the central bank lowers interest rates, then borrowers of all stripes will borrow more money (since it costs less). When the new credit is spent, the economy will pick up. Well, interest rates are now below zero, and the BoJ has pledged to keep 10-year government bond rates up at zero, and yet no one’s very interested in borrowing.
Someone forgot to tell economists that borrowers and spenders are people, who have greater concerns than the cost of funds. They want to know that they have enough money to stay out of poverty for the rest of their lives. With few children to care for them, the 25% of the nation in retirement is on its own. Lower interest rates mean lower earnings on savings, making it even harder to make ends meet. There is no reason to borrow. No desire for loans.
And much to the BoJ’s chagrin, even though the central bank prints more yen than the government issues in bonds each year and buys equities, the country’s currency is strengthening, not weakening, causing more deflationary pain at home.
The BoJ is between a rock (the country’s aging population) and a hard place (interest rates are already negative even though QE continues). But the current path, with a strong yen and the risk of deflation, is untenable. The country might try “helicopter money,” sending cash directly to consumers to spur spending, but that is a fiscal policy from the government, not a central bank operation.
BoJ governors must come up with more creative initiatives.
Now that they invest in equities, they could become activists, taking seats on boards and forcing higher wages. They could also demand higher dividend payments. Both moves would try to put more cash in the hands of consumers.
As for interest rates, the slight move into negative territory backfired. But a much bigger move, perhaps matching the -0.40% of the European Central Bank, might cause the sort of disruption the BoJ needs.
If they can’t force lending and borrowing, they must force down the value of the yen. This will cause inflation at home, pushing up the value of hard assets, and possibly enticing companies with full coffers to boost wages.
Whatever the BoJ governors decide to do, it will have to be something massive to move the markets – and therein lies the problem.
Not big enough, and the country suffers more of the same.
Too big, and the central bank risks losing control of both interest rates and the currency.
Finding the right balance will be difficult, although probably easier than convincing the citizens to either have more children, or accept more immigrants.
The largest Japan-focused ETF, the iShares MSCI Japan ETF (NYSEA:EWJ), fell $0.02 (-0.16%) to $12.56 in Wednesday morning trading. Year-to-date, the EWJ has gained 3.63%, but the fund is down nearly 18% since its inception in 1996.
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