The Bad News Bears Go To Japan
One of my favourite historical quotes was uttered 63 years ago today, when Emperor Hirohito, in announcing to the nation Japan’s surrender in World War II, stated ‘… the war situation has developed not necessarily to Japan’s advantage’. Unfortunately, the same can be said of Japan’s Q2 2008 GDP data, which showed an annualised contraction rate of 2.4%. If I were feeling charitable, I’d point out that Japan’s quarterly data is notoriously volatile, and that one quarter doesn’t say much. For example, the economy shrank by an annualised 1.7% in Q2 2007, but rebounded strongly over the next three quarters. However, the latest data must be taken in the context of several bleak signs:
- Export growth recently turned negative for the first time in 5½ years. Exports have until now been a major driver of growth.
- Consumer confidence is at its lowest since 1982, when data started being compiled. Personal consumption is pivotal, since it generates more than 50% of GDP.
- The political system is essentially paralysed, with Premier Yasuo Fukuda focusing more on his survival and the next election, which is due by September 2009, but will probably be a lot sooner.
However, even if the above backdrop were more positive, I’d be reluctant to invest in the Nikkei 225 index or other Japanese assets for the long term, because of three structural factors clouding Japan’s future. These are:
- A political system that is unwilling or unable to reform the economy to make Japan more competitive.
- A national debt burden of 150+% of GDP (the highest in the developed world), or the equivalent of US$7.7trn (more than 80 times’ Argentina’s debt when it defaulted in 2001-02).
- A declining and rapidly ageing population.
On the first point, I am sceptical that the opposition Democratic Party of Japan (DPJ) can a) win the next election, despite some polls giving them a slight edge, and b) actually implement structural reforms. On the debt front, I imagine it will surely take years, possibly decades, before the debt load drops back below 100% of GDP, which would still be a very high number. Moreover, I cannot understand why anyone would want to own Japanese Government Bonds, which yield only 1.45% (the 10-year bond) for such a high debt burden. Lebanon has a similar debt burden (albeit external rather than domestic), and its 8-year US$-denominated 2014 bonds yield 8.6%.
On the demographics front, the population could drop below 100mn by 2050, or a loss of 20%, which means a smaller domestic market, and fewer workers. I noted a few weeks ago (see July 3 2008, Japan Aims To Boost Imports… Of People) that Japan either has to raise immigration dramatically over the next few decades, or boost female participation in the workforce, or invent sophisticated robots to cope with the coming labour shortages. However, none are likely to happen quickly. I will add one bleak statistic: Japan recorded 33,093 suicides last year, marking the 10th consecutive year that annual suicides topped 30,000. This loss is equivalent to a major war being fought. Many suicide victims are working-age males, thus compounding the demographic woes. Grim reading indeed.
Japan – Real GDP, Annualised Change (%)