Japan's Stagnating Economy struggling with Debt , Deflation and Depopulation

Japan is very rich in terms of its highly developed economy. The country is positioned as third in terms of nominal GDP and fourth in purchasing power parity (PPP). Japan has also occupied the third place in automobile and electronic manufacturing industries and is also listed under the major innovative countries of the world. In the recent era, the main challenges and competition for Japan are China and South Korea. But at 233 percent, Japan is known to have the highest ratio of debt to GDP among the world’s advanced economies. Japan obviously is known for being stuck in a liquidity trap (where monetary policy is no longer effective because it is a self-fulfilling prophecy), and Japan suffers from deflation or a negative inflation rate. The core CPI (includes fresh food prices only) appears to be quite volatile, and from what I have read, this was caused by a postponed hike of consumption tax, in which simply the cost would have been passed onto the consumer. The non-core CPI, however, looks like a disaster, but there aren’t any “major worries,” according to Kudora of the Bank of Japan, which is being held down by lower energy prices. Japan also suffers from a huge demographic problem. I mean, Japan is old! There are a million factors that go into economic growth in any given quarter, and those will come along and rise and fall and whatever, but Japan has an overwhelming factor that makes economic growth very difficult, and that’s the aging population. Japan has the highest life expectancy in the world (the average person lives to 84 there) and one of the lowest fertility rates (less than 1.5 children per couple). They were one of the first countries in the world to have a below-replacement fertility rate (first hitting that point in 1959). And their current fertility is actually an improvement. Fertility got as low as 1.3 a couple of decades back, As a result of all of this, a third of the population of Japan is over the age of 60. Adult diapers are now outselling baby diapers in the country, which has never happened in any country in history. That means that the working-age population is continually shrinking while having to care for an ever-increasing population of retirees. Japan tends to resist allowing more immigrants to bolster the workforce, so you have fewer and fewer workers trying to grow an economy with limited resources. There’s a number in demographics, known as the “dependency ratio,” which is the ratio between people of working age (15 to 65) to the people outside of that age range. That ratio obviously isn’t the sole factor in economic growth, but it’s a pretty robust predictor of whether a country is capable of it. And Japan’s ratio is terrible and only getting worse. Today, Japan faces a serious economic and demographic disaster. It is a sad reality for a genuinely gracious culture that has innovated a lot over the years. Welcome to The Atlantis Report. Why has Japan's economy not collapsed yet? Well, the answer is Strong export and strong offshore investment. Japan’s economy has been hampered with weak domestic demand. Demographic with people getting old is not good for expecting a generation of demand. What do retired people need, other than a house and modest transportation? Would your everyday grandma have an eagerness for new smartphones? Would grandpa care if honda launches a new sport car? However, Japan has a well-established market for its products overseas. Take, for example, Indonesia. When you go outside, most cars that you will see are those of Japan brands. Globally, Toyota secured enough demand in this country so that the effect of the global economic crisis in 2008 did not do much damage to them. The same also experienced by Honda and Mitsubishi. Cars, and its supply chain, create enough economic demand that will make Japan’s slowdown in economy unfelt for decades to come unless people stop using them. The Japanese economy is the 3rd largest in the world. The unemployment rate is 2.8%. The job-offers-to-applicants ratio is 1.52, meaning there are 1.52 jobs for everyone who is looking for a job. The stock market is nearly back to its highest level in the post-bubble period (when it was ridiculously overvalued). Furthermore, growth is pretty good! The problem is that many people focus on the overall GDP growth rate. By that measure, growth may indeed be sluggish (next to the bottom of the G10, above only Switzerland). But a lot of that may be because the working population is shrinking. Remember, growth = change in population X change in productivity. So even if people get 2% more productive every year, if the population shrinks by 2%, GDP will remain the same. If instead, we look at per capita GDP — which is what really matters — it’s been pretty good. Since the global financial crisis, it’s been right in the middle of the G7, along with Canada — not as good as Germany or the US, but better than France, the UK, and of course, Italy. By the way, I’d also say the fact that Japanese farmers are dying off is actually a good thing for Japanese growth. As Japanese farmers die off and there’s no one left to take over, laws concerning the ownership of farmland will change, larger farms and more commercial farms will be allowed, and farming — which is now more akin to gardening than what we think of as farming — will become more efficient and productive. The country as a whole will benefit economically. The countryside may even be revitalized as more productive farmers can actually make a living from farming, instead of having to hold down second jobs. Let's not confuse a poorly performing economy with an economy on the brink of collapse. Japan's economy will undoubtedly outlast China’s and perhaps even that of the US. Most of the debt load in Japan are carried internally. The Japanese people are terrific at saving money, and that's how the country can borrow almost all the money it needs from its own people. Indeed, the flow of private savings to public spending is so great that not even negative interest rates on savings, effectively a tax on savings, have slowed that down. Despite egregious overspending on infrastructure (witness all the redundant train lines by multiple operators), there's still no hint of inflation. In effect, this sluggish scenario can continue indefinitely, and it may be unique to Japan. Typically, when a government runs up such a high debt load, the creditors will demand higher interest for financing further spending. But, that's not the case with the dutiful savers in Japan. The government will always be able to service its debts as its creditors are willing to keep lending at no interest. In fact, the demographics of aging Japan may further fuel confidence in servicing the debt. Since most of the public debt is held directly or indirectly by the elderly in Japan and a lot of it is spent to provide social programs for those same elderly, then as the elderly population crests and falls, the demand for those services should fall as well. Worst case, the government can default on the debt owed to the elderly as each individual passes. Japan already has onerous rules about estate wealth transfer. Constricting it further is well within the realm of likelihood. By contrast, China does not enjoy such patriotic savings. Its domestic savers demand much higher interest rates from the Chinese government for public spending. Implicitly, they're saying they don't have high confidence in the long-term viability of the Chinese economy. The US is in the middle with more confident savers willing to lend to the US government at just slightly positive interest rates. The bigger problem with Japan has been it’s stagnation: it hasn’t seen any robust growth in the past 25 years and is caught in a semi-permanent liquidity trap, termed secular stagnation. The government is desperately trying to spend its way out of a recession but, despite the unemployment rate being relatively low. There were two factors that contributed to Japan's long-term economic decline. The first was the Plaza Accord of 1985, which paved the way for the rise of the Japanese yen from its post-WWII rate of 360 yen to nearly 100 yen. This move was undertaken under strong pressure from the US's Reagan administration, which saw some Japanese exports as a threat to US competitiveness. The rationale of the time was that Japan had to change from an exporting nation to a consumer nation and that this change could only be undertaken if the yen was allowed to appreciate to realistic levels. When the yen did rise, it led to an overly hot domestic real estate market bubble, and then when this popped, the Japanese economy has been a funk ever since. Because Japanese banks were not willing to write down their real-estate loan portfolios quickly, the Japanese economy has been unable to move on. This has led to what economist Jeffrey Kuo has called a Balance sheet recession where companies and individuals use whatever economic stimulus is provided to paying down their own debt instead of creating new economic activity that may contribute to growth. The other leading factor which contributed to Japan's multi-decade recession is the carry trade. Because Japanese interest rates fell to effectively zero. Many businesses borrowed yen and then converted it to other currencies to invest, then repaid the yen loan. From a business's point of view, this was like free money. The net effect is that Japanese banks effectively contributed to a hollowing-out of the Japanese economy since much of this money went to Chinese factory investments. In the period from 1990 - 2014, China has been the single market that offers the best return on investments. This, in turn, led to higher rates of Japanese unemployment. With less economic activity in Japan, many Japanese just stopped spending, and instead chose to save for a rainy day. It also contributed to the rise of the Chinese economy, a country that Japan continues to have rocky foreign relations with. Basically, Japanese banks financed the downsizing of the Japanese economy. In Conclusion: I’d give Japan a C, they have stable unemployment rates (which already are low but are dangerously so), still, maintain a surplus in their trade account balance, but also has stagnating GDP and deflation, which IMHO are much more important than the other two. Look at the US, we have a high GDP, lower unemployment, increasing inflation, and a negative BoT, but since the C is much higher in the economy that is where our growth comes from. Leave a comment below if you have any questions or anything to correct. This Was The Atlantis Report. Please Like. Share. And Subscribe. Thank You.











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