Japan's anemic growth has been the fanfare of many financial media outlets over recent years. As Shinzo Abe began Abenomics in 2012 on the back of a declining population, GDP growth has struggled to respond and even fallen for several consecutive years. Today, the GDP of Japan is relatively unchanged from its GDP more than two decades earlier.
This article explores Japans problems, its response, and looks at the demographic issues plaguing the developed world (NYSEARCA:SPY).
Falling GDP is not surprising. The working-age population of Japan is falling rapidly, the population is declining, and the number of seniors that must be supported by the workforce is growing at an ever faster rate.
Following this data to a logical conclusion, the number of workers per retiree has been shrinking at a concerning rate. This concerning trend is not isolated to Japan. As birthrates decline, the demographic makeups of countries around the world are shifting.
Workers per retiree have been declining for decades without too much struggle, a point of some solace. However, this was on the back of rising wages and growing population. Japan was the first productive world economy to experience stagnating wages, declining population, and a declining workforce at the same time.
GDP growth, whether or not it is a flawed statistic, is directly dependent on a growing workforce -- whether by increased labor force participation or population growth. Many Western economies, as well as China, are soon to see the same problem to varying degrees. In this respect, it is important to understand Japan's response, Abenomics.
Stimulating A Stagnating Economy
Abenomics is the current tool of choice for Shinzo Abe. After winning a landslide in the recent election, Japan's government has the power to continue with its planned reforms and stimulus. "Three arrows" make up Mr. Abe's plan; fiscal stimulus, monetary easing, and structural reforms. In other words, quantitative easing, low-to-negative interest rates and government spending. For all its inflationary policy decisions, Japan still struggles to create it. Deflation has overwhelmingly dominated Japan over the last decade (albeit with criticism on the merits). Furthermore, the Japanese yen has failed to depreciate as much as hoped.
Keeping this in mind, it is important to note that while Abenomics failed to live up to its expectations, it has succeeded where previous economic policies have failed. As the Economist points out:
Japan's prices had fallen with few interruptions for over ten years; they are now about 5% higher than they would have been had that trend continued.
The important questions are whether the trends in Japan will continue, the long-term impacts of this style of stimulus, and whether this is an omen for the rest of the OECD.
Japanese GDP Growth
There is little doubt that population decline will continue in Japan. With an extraordinarily small number of foreigners and an unwelcoming immigration policy, the tap can not be turned on quickly.
Japan, unlike the U.S., has no birthright citizenship law. People who get visas to work in Japan pass on their foreign citizenship to their children, unless those children go through the long process of naturalization. That tends to create a class of permanent outsiders, who suffer all sorts of institutional and informal discrimination. - Bloomberg
It is unlikely Japan will be able to reverse these trends. If labor shortages start popping up, the government will have no choice but to adapt its policies. However, whether foreigners desire to emigrate to such an unwelcoming society is another question.
Perhaps the biggest question is whether this is avoidable. If populations are set to decline and wages are stagnating, both of which are true in much of the OECD, then it is not unreasonable to expect GDP to fall. Short of a sudden technological change that drastically increases worker productivity, there is no long-term solution. There may come a time when government and its people must decide that never-ending growth is a fallacy of the 20th century. For much of human civilization the growth rate, as pointed out by Thomas Piketty, was well below one percent.
Long Term Impacts Of Japan's Stimulus
Much of Japan's policies have received negative press. From accusations of currency wars to excessive debt, there is no lack of criticism for its policies. To be sure, debt has ballooned. Conversely, debt payments by Japan remain one of the lowest in the developed world as interest rates have turned negative. This year, Japan's interest bill will soak up only 10.5% of government expenditures. The government is now getting paid to borrow money (a fact not isolated to Japan). Real problems will lie in wait.
Low-interest rates inevitably encourage lending. Fiscal and monetary stimulus cause business to become bloated, and prevent any reasonable downturn in the economy. Instead, the economy seems to float by as a hollowed log. The world's economies have not had a prolonged recession in decades that has caused a revamp of business and a culling of weak companies.
Easy money policies allow laggards to survive as they can support increasing amounts of debt with stagnant earnings. In this author's view, the easy money days are going to lead to, and very much already are resulting in, lazy managers. Eventually, the cull will come. When it does, the monetary policies of today will prove to be marginally helpful, or catastrophic. Return to hyperinflation is unlikely, but widespread unemployment is not out of the question. Perhaps the robot employment revolution we have heard about for so long will come to roost, and elevate effective human productivity enough to reverse the growth trends around the world.
Prelude Or Cautionary Tale?
What matters most to those outside of Japan is whether the economic struggles are a prelude or a cautionary tale. Will we look back on present-day Japan as a precursor to slowing growth, or a cautionary tale that was avoided? The current outlook for many countries mimics that of Japan, albeit to a lesser degree. In the U.S., immigration has ensured that population growth ticks up at approximately one percent each year. However, Europe's combination of aging population, monetary union, and indebtedness are pointing on the path to deflation. A recent study by a German bank predicts that 40% of all countries will be afflicted with the same demographic problems of Japan.
Europe makes up a quarter of the world's GDP, and it is not alone in following Japans footsteps. China's one child rule and rising life expectancy could cripple the country's rise.
Demographic problems in Japan, which led to stagnating growth, are clearly not isolated. Japan has been one of the first to need to respond to the problem, and it is unclear whether the policies will have a long-term positive impact.
In light of the problem, countries from Eastern Europe to Australia have been working on methods to increase the birth rate. Many of the policies have been met with tepid success. Still, the birthrate in the developed world sits below the maintenance rate, and immigration is one of the only means of filling the gap to growth.
However, population growth brings about its own set of questions. Not too long ago, the concern was supporting 10 billion people on the planet by 2050. Populations in many developing countries continue to rise -- although, the trend of recent times is that growth is slowing. Countries with stronger demographics such as India will need to take over the growth handle if a modern economic policy is to be successful.
Eventually, we may need to accept the proposition that growth can not continue forever. Water shortages, food shortages, and commodity shortages would bring about horrible outcomes as countries fight for economic security.
Perhaps Planetary Resources, an early stage asteroid mining company, is really onto something. The first trillionaires may indeed come from a new frontier of exploiting rocks in space.
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