HS Dent reports about Japan's Demographic Collapse.
(emphasis mine) [my comment]
Japan's Demographic Collapse
By Charles Sizemore
March 22, 2009
Dennis Gartman, of Gartman Letter fame, had some good commentary on Japan's demographics in his March 20 issue that are worth repeating here. The Japanese demographic implosion is a topic that we find particularly fascinating. Here before us, we see a real-time case study in what happens to a modern country with a shrinking and aging population. In a pre-industrial agrarian society, a shrinking population means fewer mouths to feed and is a boon to those who remain. But in a modern, consumer-focused economy, population growth is a necessity. Fewer, increasingly older consumers mean fewer sales. Fewer workers means fewer people paying income taxes. A shrinking population also quickly exposes pay-as-you-go social security systems as the Ponzi schemes that they are. Let us now take a look at Gartman's interpretation of events:
We have long argued that Japan has put itself into a horrid place demographically as her birth rate keeps on plunging and as Japan is no longer replicating itself. Things have gotten so bad demographically that the government itself says that Japan's population shall halve in another 50 years.... At this point, little... indeed it appears nothing... can be done to stop this terrible demographic collapse. We are watching a demographic train wreck happen in very slow, but inexorable motion.
We like his train-wreck analogy and find it to be absolutely appropriate. Much as a train cannot veer off of its tracks to avoid a collision, there is absolutely nothing that the average Japanese citizen or even the government as a whole can do to stop the coming collapse. An individual family can decide to have more children, but their efforts will be a drop in the ocean in a country of 120 million people. With the number of women of child-bearing age getting progressively smaller, it would require an unimaginable societal shift in preference towards large families. But as Gartman contends, this is highly unlikely. Marriage and family formation are in an unprecedented decline. Despite the fact that the population is falling, the number of households is actually rising, to 30% of total households from 20% a decade ago. Young and early middle-aged Japanese have made it very clear that they are not prepared to accept the responsibility of child rearing.
In language that echoes HS Dent, Gartman saves some of his best comments for last:
Demographics drive everything. [Emphasis ours] [and mine] They are tidal in nature, and demographic trends are monstrous in size and not readily turned around. Demographic trends are the aircraft carriers of economic forces; that is, once they are set in motion it takes time... and lots of it... to turn the trend around. Japan's trend toward demographic self-destruction is now well established. The young are not about to change their selfish lifestyles, and the society is on its way toward eventually self-destruction. This has been and this shall be sad to watch.
It could be that Japan's purpose in the decades ahead will be to serve as a morality play of sorts for the rest of us.
Check out this animated GIF showing the age breakdown of Japan's population for 1930-2055, courtesy of the National Institue of Population and Social Security Research (click for full size; males are on the left, females on the right). This graphic really drives home Japan's demographic problem.
In 2000, the MIT Japan Program asks is history repeating itself in contemporary japan?.
IS HISTORY REPEATING ITSELF IN CONTEMPORARY JAPAN?
Mr. David Asher, MIT Japan Program
March 29, 2000
[This article is old, but this relevant]
How closely is Japan today repeating the economic performance and policy errors of the 1920s? That era was the previous one in which Japan systematically attempt to open to the outside world. Today, after a decade of decay, Japan's economy remains mired in stagnation. This was also the case at the end of the twenties. Similarly, democratizing reforms and financial crises characterized both periods. By further investigating the similarities in the economic situations between the periods, we can better understand the possible implications for Japan's grand strategy in the future.
Today, the economic situation in Japan can be characterized as suffering under the five "Ds": debt, deflation, default, demography, and deregulation. Regarding the first of these, Japan today is on the cusp of a debt crisis of the scope the world has not seen. Currently, Japan's government held debt is fifteen times larger than its tax revenues. This ratio is twice as high as the next highest historical record, Britain following world war two. Furthermore, Tokyo's annual interest payments account for some 65 percent of its annual tax revenues, leaving very little for financial stimulus. Rather than facing a liquidity trap, Japan today faces a debt trap. There are only two possible solutions to this. First, Japan might rely on expansionary monetary policy to infl ate its way out of the current problem. This would have tremendous effects on social stability. Alternatively, Tokyo might choose to implement IMF style orthodox economic reforms, involving large scale writing off of assets. This too would have substantial costs, necessitating deep changes in the economic system that produced the miracle of Japan's post-war growth.
The second "D" of default manifests itself in a bankruptcy rate that accounted for three percent of the gross domestic product (GDP) in 1997 and 1998. This rate is higher than ever seen in an OECD economy. As firms exercise their exit options, the unemployment rate has risen to post-War highs, and the number of businesses eliminated per year now exceeds the number created.
Deflation has been a third characteristic of Japan's current recession. More than a decade after the bursting of the Japanese bubble, asset prices continue to spiral downward. The decline in land prices accelerated to 4.4 percent last year, an even steeper decline than the prior year. Deflationary pressure is likely to continue as a result of deregulation, which reduces the cost of many consumer goods (however, at least this has some positive impact given that consumer spending in deregulated sectors has been somewhat responsive to such price changes). As deflation continues, pressure on the corporate sector is likely to increase as much of their debt relies on land for collateral --land that was valued at the peak of the bubble economy.
Demography presents the fourth key challenge to the Japanese economy. Japan is entering a profound aging crisis. By 2002, its working age population will be decreasing by 2 percent a year. Attempts to address this concern through increasing the worker participation rate are unlikely to help substantially as the unemployment rates in the youngest and oldest age brackets (the usual targets for programs to increase the size of the workforce) are among the highest in Japan. Finally, the social security system in Japan, which has been running a deficit since the mid-seventies, will soon face accelerating difficulties. By 2005, its liabilities are expected to exceed income by nearly 13 percent. In the context of the worsening fiscal position of the central government, it is unclear how the shortfall will be funded [more debt].
The fifth "D" of deregulation presents short-term dangers while holding promise in the long term. Capital productivity remains problematic. Japan still invests a third more than the US does, and its investment levels remain fifty percent higher than the OECD average. While such high rates would be worthy of emulation if they led to higher growth, today there are reasons to question the productivity in Japanese investment: Japan's returns on investment are only half as large as those of the US. Deregulation is the only solution to such unproductive economic activity.
These five "Ds" describe an economy in crisis. But is Japan repeating itself? In each of the five above areas, the current Japanese experience eerily parallels that of eighty years ago. (Debt is somewhat anomalous, as in the 1920s government debt rates were not so high.) Furthermore, both today and at the beginning of the century, we see a decline in the power of the traditional ruling oligarchs. Both then and now huge economic problems compel the nation to open itself up to external investment. Both then and now recent democratic reforms constrain the government's ability to effectively implement adjustment policies. Both then and now reactionary forces have raised voices in protest of the economic deprivations. Both then and now the policy response to the economic crisis can be characterized as weak and ineffective. In both periods it has relied on fiscal and monetary stimulus, propping up a failing banking sector, mismanagement of currency relations, and dependence on gaiatsu for stimulus for reform.
Looking forward, we might imagine
three [one] possible scenarios that could characterize Tokyo's attempts to respond to this crisis. First might be a continuation of repeating of the Taisho experience. This would consist of half-baked reform plans, continued stagnation, a continued outward migration of business opportunities, and a withering (although not abrogation) of the US-Japan alliance. A second scenario might be characterized as a repeat of the Tory Renaissance period. This would posit a sea change in views within Japan. It would include aggressive restructuring of the economy, a massive inflow of foreign capital, and a true opening of the Japanese economy. In this scenario, the US-Japan alliance would become even stronger, as befits a "normal" Japan. A final scenario might have Japan play the role of a modern day Weimar Germany. Political inaction and a reliance on magic bullets such as monetary expansion could spark runaway inflation, capital flight, economic implosion, and the rise of reactionary movements at home. Such a scenario would have profound dangers for East Asia. A Weimar Japan, while not returning to its imperialist policies of the past, might still provoke arms races in Asia. If Japan turns inward and isolationist, it may feel a need to increase its military and operationalize its latent nuclear potential. Such action on its part would inevitably worry its neighbors. [Japan's demographic collapse rules out Japan becoming a military in the way Germany did] None of these scenarios is guaranteed to come to pass. Notionally, we might assign probabilities to each: continuation of the Taisho experience, 50 percent [0 percent]; a turn to the Tory Renaissance, 25 percent [0 percent]; and a decline toward Weimar outcomes, 25 percent [100 percent]. While Japan today has more robust democratic institutions and stronger civilian control of the military today than it did eighty years ago, the prospects of the final scenario coming to pass bear watching.
In 2001, Charles Hugh Smith reports about Japan's Runaway Debt Train.
Japan's Runaway Debt Train (2001)
Imagine, if you can, an economic Hell in which the U.S. government was borrowing 40% of its annual budget, creating annual deficits of 900 billion dollars a year; where 65% of all tax revenues were gobbled up by interest payments on a mind-boggling $13 trillion public debt; and where there was no conductor in sight to stop this runaway debt train.
Welcome to Japan, where that Hell is reality.
Reports on Japan's weak economy and the mountains of bad debt in its banking system have been percolating for over a decade; every once in a while, a downgrade bubbles to the surface, and then the whole "crisis" sinks from view again, lost in the complacency of seemingly permanent malaise.
But after a decade of half-hearted attempts at reform and repeated stabs at "kick-starting" its moribund economy with pork-barrel spending, time is finally running out for Japan. For despite the endless hand-wringing about weak banks, Japan's real financial cancer lies in the public sector, run not by bankers but by politicians.
In fact, if Japan's bad bank debt magically vanished tomorrow, the root causes of the nation 's financial woes would remain untouched.
Japan's Public Spending Orgy
Japan's legenda ry work ethic has created a decade-long conundrum: how can one of the hardest-working people on Earth have one of its most troubled economies?
It comes down to this: losses and loans eventually have to paid by somebody. Sure, you can max out another credit card to make the interest payments on the last spending orgy, but at some point you run out of people willing to lend you money, and you find yourself owing far more than you can possibly pay off.
This is essentially where Japan's government finds itself: having borrowed itself into a deep hole to pay for ten "stimulus packages" (read construction pork-barrel spending) totalling over $1 trillion in the past eight years, it no longer has the ready ability to borrow enough to cover the estimated $1 trillion in bad debts held by banks, insurance companies and other institutions.
Instead, it finds itself caught in a vicious circle, borrowing more heavily every year just to finance yet more ineffective "stimulus" spending and ballooning interest payments, which in turn add another vast sum to the nation's debt load.
The numbers are truly stunning: Japan's swelling public debt of $6.3 trillion is 136% of the nation's GDP--over twice the relatively modest U.S. rate ($5.6 trillion in public debt, or about 56% of GDP)--surpassing even Italy, long the European Community's poster child of public indebtedness at 120% of GDP.
In stark contrast to the universal hand-wringing which arose when the U.S. national debt hit 70% of GDP in the late 80s, this record-breaking public debt has only recently created a ripple of concern around the world.
It's not just the size of Japan's current debt that worries observers; it's how fast it's growing. Government receipts totalled only $463 billion in 2000, while its expenditures were $830 billion.
The $367 billion difference--a staggering 40% of the budget--was borrowed, with the government issuing some 33 trillion yen of new bonds to fund the new debt. Deficit spending is now a mind-numbing 9% of the entire GDP.
This is the result of a decade of denial.
Pay Now or Pay Later
But Japan's leaders have consistently downplayed the size and the severity of their nation's woes, insisting that tepid reforms and modest set-asides were taking care of the lingering bad debt and liquidity problems.
Their "solution"--ignore the debts debilitating the banking and insurance sectors and "grow" their way out of the resulting economic malaise by spreading unneeded pork-barrel bridges, runways and reclamation projects throughout the country--has failed miserably [sound familiar?]. Despite spending $1 trillion in "stimulus packages", Japan managed only an anemic 1.2% annual GDP growth in 1995-99, compared to the U.S. average of 4.1%. And now even that meager growth has slid to a halt.
The government revised the heady 2.4% rise in GDP it had estimated last summer--which had caused a short-lived spike up in the sinking Nikkei stock average--down to a 0.6% decline in the third quarter, effectively admitting that even this rise was largely illusory.
A Mount Fuji-Sized Pile of Debt
Let's say Japan's leadership finally decided to get serious about facing their debt hangover. Just how big is it?
Very big. In fact, the nation's debts defy description. Virtually every layer of Japan's public and private institutions is larded with stupendous and largely under-reported debts.
Despite the government's modest efforts at financial reform, grandiosely titled "the big bang," there is an enormous hoard of bad debt still hidden away in banks and insurance companies; Moody's analysts estimate this dead weight totals between 30% and 40% of GDP (non-performing bank loans alone are guesstimated at about $700 billion).
Should the central government absorb this overhang of bad debt--and it is slowly taking over and liquidating the most obviously bankrupt banks and insurance companies, to the tune of $85 billion last year alone--it's estimated the public debt would quickly rise to 180% of GDP. [Funny, it did. See below.]
This is an astounding prospect. Deficit spending is almost 10% of the economy, the interest payments eat up half of tax revenues, there's trillions in outstanding bad debt hidden in government, bank and corporate books, a trillion-dollar stimulus has utterly failed, a no-growth economy staggers under a peacetime public debt larger than the world has ever seen--and still, there are few prospects for the fundamental policy changes so desperately needed.
Is this any way to run the world's second largest economy?
In 2009, Japan Inc reports about Japan's grim-and-bear-it 2009 outlook
Japan's grim-and-bear-it 2009 outlook
January 28, 2009
Things in Japan are looking grim. They keep getting grimmer, and it doesn't seem they will be getting less grim anytime soon. To give you some idea of what this means, only this week we learnt that Japan's steel production fell 28 percent in December. This was the steepest decline in no less than six decades. Meanwhile Hiroshi Yoshikawa, Tokyo University professor and head of the Japanese government business cycle measurement committee said that Japan's present recession may become the longest in the postwar era. "We'd better get ready for a three-year recession," he said in an interview with the press this week. The decline "will be very severe, not only in terms of duration but also depth".
And those famous exports, which dropped by an astonishing annual 35% in December, accounted for 61 percent of the growth in the last expansion, an expansion which was the longest in over 60 years. What this means, bluntly put, is that until exports recover there isn't much likelihood of any more general economic recovery, and exports won't recover till global trade starts to expand again, and the bank and credit crisis is over, which means you can pretty much forget about 2009 as far as I can see.
... And here we have Japan's dilemma, since something needs to be done to soften the blow of this recession, but with debt having been allowed to expand so rapidly over the last decade (see chart below), there really are limits on how much can responsibly be done.
The most obvious problem is that increasing spending at a time when tax revenue is falling threatens the government's goal of balancing the budget by 2011 [a delusional goal]. But Aso has already indicated that the government shouldn't prioritize fiscal discipline when the economy is ailing, and so far as it goes the argument is reasonable. This is a "once in a lifetime" crisis (we hope) and so once in a lifetime measures are in order. It's just that Japan has now been busily taking "once in a lifetime measures" for over a decade, and we still don't seem to be getting anywhere. But we are ballooning government debt. Many quibble [not me this figure is accurate] with the widely quoted 2008 OECD debt to GDP number of 182%, since it is a figure for gross debt (which the OECD can easily justify for reasons that we don't need to get into here). But look at the green line above which shows net debt, this has also been rising and rising, and is now near to 100% of GDP on IMF data. The point is we have just been through the longest expansion in over 60 years, and yet at no point did net debt to GDP start to fall. This is the real core of the problem that Japan faces in 2009, that previous fiscal policy did not attack the growing fiscal deficit in the good times, so there is little room to manoeuvre in the bad ones. Which is why the Japan economic outlook in 2009 is grim, grim and nothing but grim.
My reaction: This will be one of my few entries on Japan. The main reason I don't plan on covering Japan more is that the outcome is so obvious
The dollar's collapse is going to destroy the Yen by doing three things:
1) It will wipe out the value of Japan's foreign reserves, and, unlike China, Japan hasn't been preparing for a dollar collapse by investing in hard assets like gold.
2) Destroy Japans largest export market, heavily damaging Japanese economy.
3) It will create doubts about all paper currencies. Paper currencies partially backed by gold with either strong economies or responsible central banks will do ok (Chinese yuan, Russian rubble, euro, Swiss franc, etc). However, paper currencies backed by insolvent governments and irresponsible central banks will suffer, and no currency will suffer more than the yen (except perhaps the British pound)
Conclusion: There is nothing that can be done at this point. The yen is heading for oblivion.