Investors, Beware the Demographics: A Perspective on Japan Growth

Mar.25.11 | About: iShares MSCI (EWJ)

I read an article that would please Malthus. “Demographic economist” Richard Hokenson sees world population peaking at 8 billion and then falling. Good news for the planet. But there are implications for investors who’ve only known growing populations (ie. all of us).
Hokenson believes a shrinking population will mean a shrinking global economy and low interest rates.
Japan is a prime example. Its population, unchanged since 1990 at about 125 million, will fall by 20% by 2050. Japanese economic growth since 1990 has been tepid. Repeated efforts to re-start the economy have failed. Even with interest rates at nil, inflation is flat.
Hokenson says: “Aging populations don’t borrow money. It doesn’t matter what the price of money (interest rate) is. You can push out money but it doesn’t go anywhere.”
Rebuilding after the quake may add to Japan’s GDP, but still, Japan is in decline. (Of course, they may find an ingenious solution like immigration without the pesky foreigners.)
What of world class firms like Honda (NYSE:HMC), Sony (NYSE:SNE), Mitsubishi (OTCPK:MSBHY)? Already, these firms are global operations that happen to be based in Japan. With no growth at home, this trend will continue.
Last week, with stocks down, we made a tactical decision to buy the Japan ETF (NYSEARCA:EWJ) for quick profit. Our archerETF Oscillator (below) shows some potential upside remains in the position, which we will wait on before clearing.

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archerETF Metrix EWJ
Category EAFE Equity
Benchmark MSCI Japan
Total Holdings 324
52 Week High $11.61
Recent Price $10.57
52 Week Low $9.12
Avg Daily Volume 45.26 Million Shrs
Avg Daily Volume ($) $478.43 Million
Total Market Cap $7.30 Billion
ETF Annual Fee 0.54%
ETF Trading Currency USD
ETF FX Exposure JPY
Annual Volatility 26.99%
Correlation to S&P 500 78.98%
Return to Risk Ratio -93.54%
Use of Leverage No
Use of Futures No
6 month Return 7.20%
1 Year Return 3.53%
2 Year Return 34.31%
3 Year Return -12.86%
Dividend Yield (NYSE:TTM) 1.34%
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Disclosure: I am long EWJ.