The good news about Japan is that its economy is doing OK, in absolute terms, given the number of working-age people who live there.
The bad news is the number of people, of working or any age, is dropping.
The even worse news, longer term, is that debts don’t fall with population, they only get harder to pay back across a smaller base.
Japan fell into its fourth recession in five years, with the economy shrinking at an 0.8 per cent annual clip in the quarter to September. That performance looks less bad, at least to the woman in the Tokyo subway, if compared to the fact that overall population is declining at a rate of about 0.3 per cent a year, and working-age population is falling at well over a per cent annually. Growth has been stop and start, but population dwindles inexorably.
Investors, especially those with exposure to Japan’s massive government debt, don’t really care if Japan is doing well with what it’s got. While the Bank of Japan is buying up bonds faster than the government is issuing them, the longer out you look, the less sustainable the numbers appear. Japanese government debt now stands at 245 per cent of annual output, almost two and a half times the 102 per cent in the U.S.
Abenomics, an all-out programme of fiscal and monetary stimulus designed to end decades of deflation, has clearly not succeeded as planned, with this marking the second recession during Prime Minister Shinzo Abe’s three years in office.
To be sure, Abenomics has not been lucky in its timing, coming along just as China entered a long and painful growth slowdown tied to its own demographic woes and its need to transition towards internally generated, consumption-driven growth.
That’s made for an extremely hard operating environment for Asian exporters like Japan and thus perhaps it is not surprising that falling business investment was the main cause of the most recent slowdown. Expectations that the Federal Reserve will soon raise US interest rates has driven the value of the yen down, now at 123 to the dollar, giving the Bank of Japan less room to manoeuver.
Should the BOJ increase its asset buying, the yen could fall further, perhaps not enough to help exporters, who’ve not thrived anyway despite steep falls, but hurting in the process consumers who buy imported food and other goods.
This helps explain the otherwise puzzling reaction of the Bank of Japan, which meets this week to set interest rates. The BOJ may well wish, while remaining committed to the thrust of Abenomics, to wait until the global situation is more stable before it takes any further steps.
Big holders of Japanese government bonds like the Government Pension Investment Corp and the newly privatised Japan Post Bank have been on a campaign to shift into other assets they hope will enjoy higher returns.
Many of those bonds have been bought by the Bank of Japan, which as such is facilitating the retirement savings of Japan’s ageing population, but not necessarily in a way that stimulates growth at home.
“The data suggest that Japan’s excess liquidity is flowing abroad, not into investments at home. We figure that is why the yen has been so weak. We will look for further yen depreciation,” Carl Weinberg at High Frequency Economics wrote in a note to clients.
That’s certainly been true in the corporate sector. Faced with fatter profits from a weak yen, exporters have proved happy to bank the higher margins, tending to make what investments they do make into diversifying their manufacturing base offshore, rather than increasing it at home.
That has really limited the multiplying effect that its architects hoped Abenomics would have, as wages, and with them prices, haven’t gotten as much of a boost as hoped.
Looking further out, it is hard to blame either corporate Japan or the country’s retirement funds for their tactics. Both see better longer-term prospects abroad and both, having responsibility to their shareholders and investors, are taking steps to increase their exposure to markets outside of Japan.
That’s the unavoidable logic that results from a shrinking population. When you husband your resources with that future drop in population in mind you take steps that can exacerbate the problems of poor demographics.
On some measures Japan’s economy is doing just fine by its people. Per capita output should continue to grow, especially in working-age population terms.
There will be plenty to go round domestically, but the need for inflation to lighten the debt burden becomes ever more pressing and the tools still don’t seem to work.