Posted on 12/22/2014 4:18:21 PM PST by SeekAndFind
Following the start of Abenomics in 2012, Japan moved back to the center of attention of global financial markets. After two and a half decades of economic stagnation, hopes were high that Japan would escape its long stagnation and deflation.
Plenty of economists around the globe hoped that, in so doing, Japan would show the western world, mainly the Eurozone, the way to do the same and avoid a similar long period of low growth and stagnating incomes.
Conversely, the failure of Abe’s plan for Japan’s recovery would not only be a disaster for the country of the rising sun.
It would also be very bad news for central bankers and politicians in the west as well. It would prove that Keynesian policies don’t work in a world of too much debt and shrinking populations.
To assess the probabilities of these scenarios, it is worthwhile to have a deeper look on how Japan ended up in the current economic malaise.
Japan served globally as a role model for economic development in the 1980s. After an economic miracle following the Second World War, Japanese companies started to dominate in leading industries like machinery and equipment, automotive and consumer electronics.
Similar to today’s views on China, back then books explaining the Japanese miracle and describing the unstoppable rise of the nation to the leading economic powerhouse of the world were highly popular around the globe.
Japanese corporations also began to invest in prestigious artwork and trophy real estate assets around the world. When the Japanese bubble – like all bubbles – deflated from 1990 onwards, asset prices collapsed. However, credit levels in Japan remained high.
Japan acted just as the Keynesian textbook prescribes. It compensated a deep drop in domestic demand with higher government expenditures. As a result, many companies, which in reality were insolvent, were not restructured – but kept alive with low interest rates and bridge financing.
What happened over the past 25 years is simple: Japan’s corporate sector was a net saver and reduced its leverage. Private households also reduced their savings significantly, from levels of 20% to 3% today. Finally, the Japanese government built up a huge debt load, rising from about 50% of GDP at the end of the 1980s to close to 250% today.
Despite all of this, the efforts to reignite growth in Japan failed. The only results were a significant increase in the overall debt burden of the country and a change of the principal debtor. That debtor is now the Japanese government — instead of Japanese corporations as before.
At the same time, the workforce in Japan started to shrink. Actually, Japan reached the peak in its workforce at the same time as its financial bubble peaked. That suggests that the peak in the workforce became an additional driver for the build-up of the bubble.
If so, this would be another disquieting parallel to Europe, where the labor force also peaked in parallel to the credit bubble in 2007.
One fact is often overlooked. Precisely because of the Japanese population’s shrinking, on a GDP per capita basis the Japanese economy has been outgrowing the U.S. economy in the quarter century since 1990.
That seems to be good news. Why then worry? Unfortunately, GDP and debt are nominal quantities. Debt can only be served out of nominal income. It thus does not help a country if its GDP per capita grows and at the same time the population shrinks.
Here again, Europe has reason to worry. Europe is in the beginning of a similar demographic development – albeit one that is not as severe in all European countries as it is in Japan, thanks to the European Union’s more open immigration policies.
Japan can therefore be described as a country that has the following features:
1. Above average per capita productivity growth.
2. Shrinking population (from currently 127 million to 87 million inhabitants by 2060).
3. Low real economic growth for decades to come (as demographics continue to deteriorate).
4. Shrinking savings rate, due to an older population which will start dissaving soon and therefore will not continue to fund the deficits of the government as in the past.
5. Corporate sector with a strong balance sheet after 25 years of deleveraging, but with low investments and no inclination to invest in Japan (given demographics). Corporations are thus a net saver.
6. A government with record high debt of nearly 250% of GDP.
7. Debt service already consumes 43% of the Japanese government’s revenues, just to cover interest on the outstanding government debt – and in spite of interest rates being close to zero.
8. A central bank, which adapted quantitative easing already in 2001 and is willing to do everything that is necessary to support its economy.
9. A country that has failed to generate inflation until now, but has rather seen a long period of stable consumer prices and slightly falling overall price level as measured by the GDP deflator.
Simply put, such a country is bankrupt. No economy can sustain a total debt level (for the government, households and non-financial corporations) of more than 400% per cent of GPD without having a nominal growth rate that is significantly higher than the level of interest rates.
In fact Japan is showing Europe how it is NOT done:
You don’t import ARMIES of people who loathe your country.
To do so is retarded, and Europe has done exactly that.
TIP — Stupidity is bad but avoid total retardation.
Japan will NEVAR import people who loathe Japan, hate technology, and want to return to the 7th Century.
Regardless, looks like Japan is screwed. Certainly they don’t have anything on the Euros.
RE: In fact Japan is showing Europe how it is NOT done:
You don’t import ARMIES of people who loathe your country.
______________________
Then Japan only has two other choices demographically:
1) Have more babies
2) Be open to immigration, albeit CAREFULLY and based on criteria advantageous to the country.
Is this what China is heading for when the bubble bursts.
Is the writer nuts?! Most of Europe's immigration is due to muslims. Europe will pay a heavy price for allowing this unfettered immigration.
I agree, Japan has problems but when they solve them, they will still be Japan.
America destroyed itself through immigration, and Europe will never recover, even if they ended it today.
The West has committed suicide, for short term gain.
A good chunk of the economic growth Japan enjoyed was born with the virtual total replacement of the capital stock in Japan after WWII, much of it with US help. Japan also saw its stock of capital all age to the point of replacement within a short time frame and did not have the funds to replace what was wearing out. It appears that some chewing gum and band aides were the way out rather than facing up to the real issues. The piper was not only not paid, he left town.
Japan will never opt for your #2, immigration. It’s hard for them even to accommodate the 1% or so that are (mostly secretly) Korean, and there is no other ethnic group as closely resembling (and in many ways acting) Japanese than Koreans, despite history and the rivalry.
You know what most people say of Japanese men who marry Phillipina or Thai women?
They say these men married PROSTITUTES.
They don’t even say it venomously, and 99% don’t say it at all.
But that’s exactly what most people think.
To be different in Japan, well....it’s very close to making people uncomfortable. They want you to be totally fluent, totally at ease with many levels of speech and to instantly know The Way to Behave in 100 different situations.
This just not jump out at short-term visitors and many of those who stay long term gradually find it impossible to fully make this important stuff explicit.
They day you see Japanese cops who are fully ethnically Phillipino, well...to me it’s inconceivable.
Japan is going to make robots to take care of the old people and they’ll stubbornly skootch through the Silver Bulge.
They won’t raise immigration even 5 or 10%, I think.
From your screen name, I guess you must be a foreigner living in Japan...
final push, especially if the immigrants are chosen from places w/ deep Protestant roots. (The Protestant work-ethic is/has-been credited w/ building capitalism.)
Paul Krugman would say they didn't borrow enough.
("And the big fool said to push on!")
Even with all its problems - Japan will be Japan 100 years from now. America and Europe will not...
bump
Japan is importing Koreans and treating them like 2nd class citizens.
Not unless they start breeding at a much higher rate. World history teaches us nothing lasts forever.
Japan needs to eliminate all disincentives to marry and have children, and create incentives. Structure things so that young people know they will either have 3 or more kids or have a miserable retirement.
What’s with the lack of children?
We have to spend billions to brainwash our birth-age population into not making enough children. Are they spending even more?
Ping - Japan
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.