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Neal Kimberley

Japan, faced with an ageing and shrinking population, saddled with a huge public debt burden, and still fighting deflation, cannot afford a strong currency.
If Japan is to make the most of its overseas investments and income to help manage its domestic problems, it needs to ensure its currency remains weak, so that when those foreign currency earnings are repatriated, they buy more yen.
"This is a country that is facing a monumental, really unprecedented task," Kalpana Kochhar, the IMF's mission chief for Japan, said earlier this month.
She was not kidding.
As of October 1, last year, the number of people living in Japan was 127.1 million, down 215,000 from a year earlier and the fourth straight year of population decline, according to Japan's Ministry of Internal Affairs and Communications.
Of that total, 125.4 million were Japanese nationals.
But population decline is only one aspect of the problem.
Of the total, 26 per cent were aged 65 or over, compared to just 12.8 per cent in the 14 or younger cohort. Japan's potential workforce is literally dying out, with the birth rate insufficient to replenish the labour supply.
It is perhaps no wonder that Japan's unemployment rate is a mere 3.5 per cent, arguably as much a reflection of the labour supply side of the equation as of the demand for workers.
Immigration could fill the gap but as the October 2014 data shows, the ministry calculated just 1.67 million foreign nationals among the total population. Of course, Japan might not be open to mass immigration anyway.
Controversially, "Let them in - but keep a distance", a personal opinion piece written in February by Ayako Sono, a former adviser to Prime Minister Shinzo Abe, argued apartheid was a model for how Japan could expand immigration.
Sono's position is extreme, but the country is definitely not rolling out a welcome mat to potential immigrants.
That kind of candour is up there with comments about the costs of treating Japan's old and infirm, made in April 2013 by Deputy Prime Minister and Finance Minister Taro Aso.
"You cannot sleep well when you think it's all paid by the government. This won't be solved unless you let them hurry up and die," Aso said.
The October population data suggests the country's pensioners have decided not to follow Aso's advice.
But the net result is that social welfare spending now accounts for one-third of total government expenditures.
Cutting that would be "politically very difficult", said Tom Byrne, a senior vice-president of Moody's Investors Service, which cut Japan's sovereign debt rating by a notch to A1 in December.
There is yet another problem. Even if Japan had the workforce, it literally lacks the home-grown energy to power the economy.
Post-Fukushima, almost all the nation's nuclear power stations remain offline, leaving Japan dependent on imported energy, the price of which fluctuates according to global demand and supply factors.
Meanwhile, the public debt burden stands at an eye-watering 230 per cent of gross domestic product, and that debt has to be serviced.
The Bank of Japan's ever-expansive monetary policy has so far ensured continued stability in the government bond market with the central bank buying up very low yielding yen-denominated paper. That leaves the sellers to seek better returns elsewhere.
Those Japanese investors in overseas assets will receive a foreign currency income stream that will be worth less, in yen terms, if Japan's currency rises.
In the same vein, Japan's exporters have long been shifting their operations overseas, but, have remained headquartered in the country, repatriating their foreign income earnings.
As recently as April 15, Toyota Motor Corp announced it would build a US$1 billion plant in Mexico and spend US$400 million on new facilities in China.
The weaker the yen is, the greater the value of those foreign earnings in yen terms, helping, along with repatriated investor income, to ease the country's yen-denominated predicament.
That fact will be well understood by Yukitoshi Funo, a former Toyota executive, who was nominated to join the Bank of Japan's policymaking board on April 21.
Japan is a rich country with very sizeable overseas investments but beset by a staggering public debt burden, a lack of resources and poor demographics.
For Japan, keeping its currency weak is now almost a national necessity.


Why Japan's demographics make a weak yen a necessity

Japan needs to ensure its currency remains weak so that more foreign earnings in yen terms are repatriated. Photo: Bloomberg

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The ageing, declining population, reliance on energy imports and public debt burden make increasing the amount of foreign earnings a necessity


Why Japan's demographics make a weak yen a necessity

.css-1c6uqr6{color:inherit;font-weight:inherit;font-size:inherit;font-family:inherit;line-height:inherit;overflow-wrap:break-word;}The ageing, declining population, reliance on energy imports and public debt burden make increasing the amount of foreign earnings a necessity

The ageing, declining population, reliance on energy imports and public debt burden make increasing the amount of foreign earnings a necessity