The End of Japan as an Industrial Power?

by: Michael Mandel

I don’t mean to be apocalyptic here, in the face of the terrible tragedy hitting the Japanese people. But I think the current crisis is going to accelerate the aging of Japanese society, especially if the nuclear disaster gets worse. And I’m wondering whether we are seeing the beginning of the end of Japan as an industrial power.

Think about this from the perspective of an executive running a major Japanese manufacturer. In the short-term, when you are facing all the problems at home, you may find it appealing, wherever possible, to ‘temporarily’ switch over much of your production to either China or the U.S., your two major markets. This can be justified, patriotically, as the need to keep up profits to help fund the reconstruction of Japan.

But you may not want to move that production back again. In the medium-term, as you consider how much to invest in rebuilding your factories and infrastructure in Japan, you will face a demographic problem–the coming collapse of the working-age population. Take a look at this chart:

(Click charts to expand)

Basically, Japan’s working-age population is anticipated to drop by 20% over the next 20 years. And that actually understates the problem in the rural areas, which have felt a youth drain to the big cities. ( see here and here ).

That makes it much more attractive to invest in China and the U.S., of all places, which have more desirable demographics for both the workforce and consumption. Ten years from now, much of what is made in Japan today will be made elsewhere.