Welcome to the final installment of “Japan’s Cautionary Tale: Debt and Demographics.” If you have not read the first three installments, they can be found here, here, and here. In order to complete our analysis, we first need to identify and review key information derived from our social, socioeconomic, and macroeconomic indicators covered previously.
Summary of Social Indicators
- The population of Japan peaked in 2010 (128,070,000) and has been slowly declining ever since.
- A fertility rate of 2.1 is viewed as being necessary to maintain a stable population. Based on this assumption, Japan has not had a satisfactory fertility rate for population maintenance, let alone growth, since about 1973.
- The number of live births in 2017 was 34% lower than in 1985.
- The number of first marriages decreased by 38% between 1995 and 2017.
- The Japanese government has signed into law a set of policies to expand nursery care, empower fathers to take paternity leave, and implement local matchmaking services. The government is even subsidizing the cost of dating sites and funding "marriage-promotion committees" to try and reverse their population woes.
Summary of Socioeconomic Indicators
- The labor force participation rate in Japan fell from almost 75%, two generations ago, to below 60% after the 2008 financial crisis. It currently sits at approximately 62% in 2020.
- The labor force participation rate for both males and females currently stands at 72%; the male rate has declined from a high of 83% in 1960 while the female rate has increased from a low of 57% in 1990 (a figure which would likely be much lower if the data series went back further).
- Despite the massive increase in the number of females in the workforce, the labor force participation rate has trended downward since its peak in the 1970’s. Since the metric considers only citizens between the ages of 15-64, this trend could be explained by the confluence of Japan’s rapidly aging population and/or fewer job opportunities in general.
- The CPI is 5 times higher than it was in the 1960’s but has been stagnant since the late 1990’s.
- Household spending has been flat and/or declining for at least the last two decades.
- Wage growth peaked in the 1970’s and has been trending down ever since. In fact, wage growth has been trending negative since the 2008 financial crisis as shown below.
Summary of Macroeconomic Indicators
- The BOJ’s balance sheet has become so large, through the purchases of government debt and equities, that it surpassed the GDP of the entire country back in 2018. As a point of reference, the Federal Reserve’s balance sheet is roughly 33% of its GDP despite historic levels of balance sheet expansion.
- The BOJ owns more than 45% of the Japanese bond market and more than 8% of the equities market. These figures were compiled as of 2018 and 2019 and are likely to be much higher today as a result of Covid-19.
- Japan has the highest public debt to GDP ratio in the world, higher than profligate and dysfunctional countries such as Greece, Italy, and Lebanon.
- Private debt to GDP has been steadily declining for the last 3 decades.
- The BOJ’s benchmark interest rate, the rate they use to try and control other rates, has been at or near 0% for two decades. The two-year bond yield is currently negative at -0.123% and the ten-year bond could be negative soon yielding just 0.036%. In modern times, low bond yields indicate tight money conditions.
- The Nikkei 225 peaked back in 1989 and has not come close to reaching that peak since. Attempts by the BOJ to re-inflate its stock market have been futile.
- Japan’s GDP peaked in the mid 1990’s and, with the exception of a short-lived spike in 2012, has remained below that number ever since. The momentary spike in 2012 can be explained by the extraordinary spending done by the Japanese government; without it, the GDP figure would be much lower.
Final Thoughts on Japan
The BOJ’s benchmark interest rate has been declining since 1980 but has been stuck on 0% for the last 20 years. As stated above, low interest rates indicate tight money conditions, specifically via a lack of willing lenders. When banks can find no suitable borrowers and money is not lent, the economy grinds to a halt. This degenerative economic feedback loop leads to declining employment opportunities. When wages are low, hours long, and both genders forced to participate in the workforce, then the ability to plan and care for children is constrained.
The symptoms of an economy with low to no growth are myriad. Symptoms include: declining population growth, low wages, declining labor force participation, rising debt, deflation, and investment vehicles of low quality. The key is not to confuse the symptoms for the cause. The cause is artificially low interest rates, and the solution is to allow the market to determine the equilibrium rate of interest. It’s impossible to find the right financial footing in order to support population growth with declining wages, bonds that don’t provide a suitable yield, a broken stock market, a bloated cost of government, and the need for both genders to work to make ends meet. Furthermore, this economic and population decline exacerbates government finances decreasing tax receipts, thus making it increasingly more difficult to service debt and meet obligations such as social security.
There is the possibility that bonds could go more deeply negative, in which case it may still be prudent to park excess savings in JGB’s (Japanese Government Bonds) since the price of the bonds themselves would rise in that scenario. However, with rates as low as they are already and no historical precedent for yet lower rates, it is increasingly risky to do anything with additional savings aside from keeping it in cash.
Conclusions: The Economic and Social Impact of Japanese Economic Policy
Japan’s situation is less hopeless than many countries with similar debt and demographic issues. Even though Japan has found itself in a mess from its’ own mistakes, the solutions to its’ problems will rest squarely on its shoulders due to the homogeneous nature of its population. As a result, whatever solutions are prescribed will be more unanimous. A country that contains vastly different cultures within its border will not find such luck trying to right the ship as conflicting solutions to fix the problem will be amplified and lead to tension. Such is the current situation in North America and parts of Europe.
Japanification in the United States
One additional country with high debt, low interest rates, a declining fertility rate, and a diverse population is provided below along with some key charts. The country of which I am speaking is the United States. The United States has mirrored Japan in terms of fiscal and monetary policy. The only difference between Japan and the US is simply the time table, the US being a decade or so behind. However, the US Government and Federal Reserve are wasting no time in their attempts to catch up.
The Fed Funds Rate provided above has essentially been at 0% since the 2008 financial crisis with no signs of a shift coming anytime soon.
The chart above captures 2019 data for the US. The response to the pandemic has pushed this ratio much higher in 2020.
The US fertility rate of 1.73 in 2018 was below the rate of population maintenance (2.1). However, the fertility rate was also below the rate of population maintenance during the 1970’s and 1980’s. The small uptick above 2.00 can be explained by the large-scale immigration that took place in the US between the 1970’s and 2000’s. The fertility has rate has been in decline since the 2008 financial crisis.
Percentage of population that is non-Hispanic white
Non-Hispanic whites as a percentage of the population was down to 62.8% in 2012, a figure likely even lower today (source). This figure was 88% or so in the 1950’s and 1960’s, meaning a large-scale shift in culture has been underway for quite some time. Further research would need to be done to break this data down further into things like Catholic, Protestant, Celtic, Slavic, etc. but the key point is that there are many cultures living in the US at the current time.
The US data is looking very similar to Japan. We've seen a huge shift downward in rates of marriage, birth, and the labor force participation rate in addition to having stagnant wage rates. Public and private debt levels are also soaring. Beginning in 2009, the Federal Reserve followed the Japanese playbook with the initiation of Quantitative Easing (QE) and it appears this "extraordinary monetary policy" is becoming permanent.
The problem, however, is that “Japanification” will look much different outside of Japan in places like the US, Germany, and Spain. Each of these countries shares similar statistics to Japan with the exception being that they are far more diverse. While Japan has been able to withstand stagnant economic conditions for decades without social fracture, other places likely won’t have the same luxury. The current ongoing protests in the US are evidence of this. Furthermore, multicultural societies have a long history of becoming failed states. We no longer have: the Austro-Hungarian Empire, Soviet Union, Yugoslavia, Czechoslovakia, the Umayyad Caliphate, etc. due in large part to internal cultural conflict. Even the Roman Empire suffered from the conflict of interest from incorporating Germanic mercenaries in the legions.
This series is designed to illustrate the deleterious effects that artificially low interest rates have on population growth and an economy over an extended period of time. A policy of low interest rates will always lead to social and economic malaise. Tread carefully.
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