Japan’s Doomsday of Demographics and Debt
I first lived in Japan back in 1979.
The economy was five times larger than China’s. Its population was young and vibrant. Its government debt was less than 50% of GDP.
Now, when I go to Japan, I see an entirely different country. Its economy is less than one-half the size of China’s. Its population is the oldest in the world. Its debt, at 250% of GDP, is five times worse. And Prime Minister Abe’s victory in a spot election this weekend has given him the mandate to borrow-and-spend even more.
Each problem compounds the other in a vicious triangle:
One of the main reasons the debt is so large is because the government has made so many commitments to transfer resources from young working people to old, retired people.
And one of the main reasons the economy has fallen so far behind is because supporting so many elderly is such a crushing economic burden for the shrinking number of young people.
In the early 1980s, I worked as a financial analyst at a major Japanese brokerage firm in Tokyo. My average workday was 11 hours, Monday through Friday, plus six hours on Saturdays.
I like work. So I had no complaints.
But at the time, most Japanese companies had been looking for a way to ease up a bit on the workload. So they introduced a new, “liberal” policy of giving us a day off on the third Saturday of every month. Whoopee! A weekend once a month!
I thought that was going to be a trend, and it was — for a while. Now, though, due to the shrinking workforce, many employers in Japan are reverting back to the old days.
Nearly nine out of ten companies can’t fill their job openings. Nor do they want to hire foreign workers. Friends of ours who run the country’s leading recruitment firm have tried to persuade them to do so, but with little success.
Instead, the companies are demanding even more from their young employees, sometimes worse than the 1970s.
The pressure to perform is so intense, many simply have no time for a relationship. Marriage is a pipe dream. And all this compounds the …
Demographic Timebomb Exploding NOW
In 2015, Japan’s census confirmed that its population decreased for the first time since the government began counting in 1920. It is now expected to shrink from 128 million to less than 85 million in the next five decades.
The proportion of elderly will reach a mind-boggling two-fifths of the total.
Already, the number of truly old people in Japan (90 and above) has topped 2 million for the first time.
Meanwhile, the number of 18- to 26-year-olds has been falling for over two decades. In 1994, there were over 18 million in this age group. Now there are fewer than 11 million, down by about 40%.
In the wake of this demographic disaster, small towns across Japan are on the verge of collapse.
The bulk of the population is clustering around the Tokyo-Osaka corridor. In 1950, 53% of Japan’s population lived in urban regions. Now it’s close to 95%. In at least 15,000 communities, HALF of the population is over the age of 65.
In some rural regions, families tear down unused homes, turning the land back into fields.
Bears attack settlements in Japan’s north.
Wild boars ravage farmland across the main island of Honshu.
The full responsibility for rice fields and vegetable gardens falls on folks 80 years or older, despite disability and illness.
Japan’s “Solution”: Tax the People to Death
In 2014, Japan’s consumption tax (like a national sales tax) went up from 5% to 8%. Still another big hike — to 10% — is already law. (Due to Japan’s economic doldrums, it has been delayed until October 2019.)
Japan’s inheritance tax, already among the highest in the world, was jacked up even further in 2015. Standard exemptions were slashed by 40%. Suddenly, the number of average citizens subject to the inhreitance tax surged.
Why such big tax hikes despite a mediocre economy? Mainly because there are fewer people to tax.
In any case, it hasn’t helped very much. After peaking in 1983, the government’s tax revenues have been going mostly downhill. Receipts from inheritance taxes plunged nearly in half, mostly because of a decades-long crash in land values.
Compared to trends in GDP or the stock market, these kinds of trends in debt and demographics are relatively slow-moving.
They build up over a period of decades. People go about their lives and take them for granted. They’re mostly oblivious to the consequences.
The United States has similar troubles, just not as extreme.
“Don’t worry,” say the analysts. “It’s just slow-moving lava.”
So despite these horrendous pressures building up over time, Japan’s economy grows a bit. Its stock prices rise. False hopes spring eternal … until, that is, the tipping point.
When and how will that happen in Japan?
With his just-announced election victory, Abe will reform the nation’s pacifist constitution, opening the way for a major build-up in military spending. The country’s already-huge debt load will grow even larger; the need to float government bonds, even more urgent.
Then, events will unfold in very much the same way they did in 1990, when Japan’s stock market crashed and its economy sank into a multi-decade depression.
The Bank of Japan will raise interest rates — just one notch.
Bond investors will pull back — just a wee bit.
They will start selling their long-term government bonds — not in huge amounts at first, but enough to tip the balance of supply and demand for bonds. Enough to precipitate a pretty siginificant decline in bond prices.
As bond prices decline, other investors, including Japan’s largest insurance companies and pension funds, will begin to unload their bond holdings.
Suddenly and without warning, Japan will face its Doomsday of Demographics and Debt.
It will blow up. And in the process, trillions of yen in flight capital will flow to the safest safe haven on the planet — the United States.
It will drive up stock prices in one last-hurrah!
And U.S. investors in the know — who buy the assets that foreign money WILL be chasing — could make several fortunes.
This is not going to be put off to some far-away future date. It is on the verge of starting right now. And it’s bound to accelerate very, very quickly.
That’s a key reason why I invited you to join our Supercycle Investment Summit last week.
And it’s why we’re leaving the video recording of the first session online for now. But due to the timely nature of its contents, it must go offline tomorrow.
Good luck and God bless!