Population Decline And Japan's Stock Market

by: Michael Lubeck


In the past 40 years, the annual number of births in Japan has declined from a little over 2 million to a little over 1 million.

The secular decline in birthrates means fewer consumers and fewer investors. Fewer consumers to fuel the economy at age 30 and fewer investors to bid up stocks at age 40.

The production of manufactured goods requires significant capital investment. This capital stock must be fully utilized to maximize the investment. The excess capital stock is now a liability.

Japan's trade imbalance will persist, hurting the economy and stock market. The economy is based in manufactured goods, not commodities. The flow of exported goods cannot be as easily adjusted.

During the 1980s, Japan had the most dynamic market in Asia. The market peaked in 1990. Twenty years later, it was down 75%. As shown in the chart, the market has been volatile.

After a stellar 57% return last year, Japan is again attracting attention. Japan has also implemented Quantitative Easing on a large scale. This raises questions about the sustainability of the rally. The purpose of this essay is to examine the market in the context of demographics.

Demographics In Japan

Compared to 1980, men wait an additional 2.9 years to get married and women wait an additional 3.8 years. As of 2011, Japanese men wait until age 30.7 and women wait until 29. In both Japan and Sweden, the average age for marriage is increasing. It is likely that this development is taking place in other countries. On average, women in Japan had their first child at age 30.1 This was the first time age 30 has been exceeded.

The annual number of births has declined from a little over 2 million in 1973 to a little over 1 million in 2012. That is a 50% decline in 40 years. The first half of that period, from 1973 to 1993, saw the steepest decline. The decline has been more gradual since 1993. Fewer births mean fewer adults in the future.

Correlation Between Birthrates And Stocks

Observe the effect of the correlation between birthrates in Japan and the stock market when births are projected 40 years into the future:

1. The number of births fell beginning in 1950 and did not make sustained upward movement until 13 years later in 1963. Forty years later, the stock market fell beginning in 1990 and did not make significant (triple-digit) upward movement until 13 years later in 2003.

2. The number of births rose in the 4 years from 1963 to 1967. Forty years later, the stock market rose in the 4-year period from 2003 to 2007.

3. The number of births declined in the 2-year period from 1967 to 1969. Forty years later, the stock market declined in the 2-year period from 2007 to 2009.

4. The number of births rose in the 4-year period from 1969 to 1973. Forty years later, the stock market rose in the 4-year period from 2009 to 2013.

One can surmise that stock prices are linked to demand for stock as an investment vehicle. Forty years after a notable rise/decline in the birthrate there is the tendency for a notable rise/decline in stock prices. Remember that the average age for a woman to have her first child rose to 30.1 This would indicate there is rising demand for stock just 10 years after the first child is born. The approach, if it is correct, shows remarkably disciplined investment. Investment activity increases immediately after the most intensive child-rearing years.

The correlation between the birthrate and the stock market is valid because Japan has a consumer-driven economy. A chart showing Russian stocks and energy prices is given below. The relation between the price of stocks and the price of energy is clear. The price of energy directly impacts the viability of firms in the Russian oil and gas sector. A downward movement in the price of commodities cause financials to deteriorate just as an upward movement cause financials to improve.

The working-age population of Japan is expected to fall 40% in the first half of the 21st century (see chart). The number of births peaked in 1973. On average, the people now getting married were born in 1984 (2014 minus 30). It means that the number of people getting married, and the increased spending associated with household formation, has been declining for the past 11 years (1984 minus 1973). There is less economic activity when there is a decline in the number of people to increase spending on child rearing.

The number of births in Japan, beginning in 1950, has been reviewed. A 40-year link between birthrates in 1950 and stock prices in 1990 has been established. The birthrate had exceptional variability in the 20 years which preceded 1950. Birthrates from 1930 to 1950 correspond to stock prices from 1970 to 1990. There is a gradual uptrend, well into the second half of the period, before the curves become increasingly steep toward the end.

The Stock Market

The investment implications are obvious. The year 1973 marks the beginning of an extended and sustained decline in the number of births. It is rare for there to be such an unambiguous marker in the history of a country. After last year's run-up, investors may be considering investment. A word of advice for the long-term investor: Don't.

There is no catalyst on the horizon in terms of demand for investment for at least the next 41 years (2014 minus 1973). Nor is there a catalyst in terms of increased economic activity associated with child-rearing. Economic activity has declined for the past 11 years (1984 minus 1973) and is set to continue for at least the next 30 years (2014 minus 1984).

In Japan, the number of people younger than 41 (born after 1973) will begin to decline. Also, the number of people who are older than 64 (born before 1950) will increase. Economies of scale will be difficult to achieve with a smaller workforce. The aged, as their number rise, will increase the need for social safety nets. Demand for consumer goods will decline. Retirees will have spending constraints and there will be fewer young adults.

There is a way to counter declining consumption in Japan. Economies of scale could be achieved by increasing exports to other nations. The problem is that every yen of exports must be balanced by a yen of imports. Until 1980, the number of 30-year-olds (prime household consumers) grew. Exported goods fueled consumption at home.

The number of people born in Japan grew until 1950. Prior to the year 1990, Japan could grow exports because investment begins to increase at age 40. Until 1990, the number of people to turn 40 (born before 1950) was increasing. These people were entering their investment phase. Now, the youngest of those born before 1950 are 64 years old. They have exited their prime years for investing.

As the number of consumers declined, income from exported goods went to improving infrastructure and production capital. Income flowing in from abroad was not consumed; it was used to build capital stock. This exacerbates the situation by creating an overhang of capital. Capital is tied up in physical assets that cannot be fully utilized. Unlike Russia, Japan does not have the option of exporting energy instead of goods. A production/consumption imbalance exists in Japan.

Commodity production can be adjusted like the flow of water from a spigot. Increased production of goods, by contrast, requires increased capital investment. Commodity-based economies have the advantage of varying production to meet consumption demands. The capital investment required to produce goods cannot be adjusted as easily. Manufacturing plants incur fixed costs regardless of their production level. The excess capacity raises production costs and lowers affordability. Consumer goods become more expensive and, in turn, individuals have less money to spare for investing.

Impact On Japan's Economy

VIRTUOUS CYCLE (Rising number of people turning 30)

Increasing exports … Increasing revenue … Increasing consumption (repeat)

The result is increased need for investment.

VICIOUS CYCLE (Declining number of people turning 30)

Increasing exports … Increasing revenue … Decreasing consumption (repeat)

The result is decreased need for investment.

Disclosure: The author has a small position in Pro Shares Ultra Short MSCI Japan (NYSEARCA:EWV). I am long EWV. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.