Japan's Population Problem

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Includes: FXY, JYN
by: Sean Maher

I wrote about Japan's secular economic decline several times in 2008, determined by the developed world's worst demographic outlook.

In short: over the next 20 years, the workforce will decline by 20%. Five years ago, Japan's population was 127.7 million; today it is marginally lower but the composition has changed radically. In 2004, the population below the age of 15 was 17.7 million and the population aged 65 and over was 24.9 million. Now, the population below the age of 15 has dropped 3.5% to 17.1 million, while the number of people older than 65 has increased 16% to 28.9 million.

This devastating trend is set to accelerate over the next decade, with the working age population declining by 0.9% a year, implying a major drawdown of Japan's savings mountain, with adverse implications for the Yen and JGB yields. The household savings rate relative to disposable income has fallen to 2% from 14% in the early 1990s at the beginning of Japan's long decline, while government debt will probably hit 200% of GDP by next year. The country's birthrate has plummeted since the 1950s and has been below replacement level (2.1 births per woman in developed countries) for decades. Today it is at a mere 1.2 births. As a result, Japan now has the highest proportion of residents over the age of 65 in the world, and the health ministry estimates the country's population will decline by 25% by 2050, despite rising life spans.

By 2050, 40% of the Japanese population will be over 65. Where Japan has led the rest of the developed world will soon follow with a steep drop in the global birthrate since the 1970s that has resulted in a rapidly aging population and workforce in Europe, Japan and soon too in the US (which has been spared by Latin immigration). Not only does this have direct economic implications on household formation, demand for durable goods etc, it has a cultural impact too, making a society more conservative and averse to risk-taking.

It's a phenomenon that strikes me whenever I travel from youthful and dynamic London to cities in Europe like Vienna or Munich with a much older population on average, which are impressively prosperous but also stultifying. Globally, the world's birthrate looks set to drop below replacement level around 2040 (although population will still rise for some time after as longevity extends).

As well as inflationary labor shortages, a shrinking and aging workforce also translates into a loss of innovation and entrepreneurial activity that's not easily replaced. Older workers tend to be more conservative and less risk-taking by nature. Additionally, when a growing share of a country's gross domestic product must go to support retirees, that crowds out investment in new ventures.

The Japanese have also resisted one rapid action that would boost population: opening up their doors to more immigrants. Indeed, as unemployment has risen in the current downturn the Japanese have done the exact opposite, sending some foreign workers home. Japan's population problems are already so acute that it would take a massive influx of many millions of foreign workers to make much difference, and that's politically very unlikely.

At some point, the markets will realize that the Yen sub 90 to the USD and 10 year bond yields at 1.3% are economic anomalies in the context of Japan's deteriorating fundamentals, and sell both aggressively.