Japan Is Dying

Two or three decades ago, it was fashionable to say that Japan was the future. And now it seems that we were right: Japan does look like the future. Just not in the way we expected.

Back in the 1970s, Japan was the rising economic powerhouse that was set to shift the balance of power from West to East, rather like China is supposed to be today.

Then look what happened. It suffered not one lost decade but two of them, and is heading for a hat-trick. And as far as I can see, this is only the beginning of its woes.

Dead country
I spent a couple of months in Japan 20 years ago, and I loved the place and the people. But it pains me to say that unless the country goes through a radical (and unlikely) transformation, it will be no more. It will cease to be. It will shuffle off its mortal coil, run down the curtain and join the bleedin' choir invisible.

It will be an ex-country. Do you want to invest in that?

How much debt?
Japan has problems. It has public sector debts of nearly 250% of GDP, compared to 59% in the U.K. Its budget deficit is 8.7% and no plan to shrink it for at least five years. And this week, ratings agency Standard & Poor's downgraded Japanese debt from AA to -AA, claiming it lacks a "coherent strategy" to control this massive deficit.

So far, Japan has been able to service its borrowings by turning to its own people, who buy 94% of its government debt, even at rubbish yields of around 1.21%. But this can't go on forever, and for a very worrying reason.

The future is grey
Japan is aging. It has the oldest population in the world, with an average age of just over 44 years. And it's getting older.

I like old people, but you can have too many of them. In Japan, there are just three workers for every pensioner. In a decade, that will fall to just two workers, and continue to shrink. Japanese pensions have been notably generous. That will have to change.

Just as people shrink with age, so do countries. By 2055, the Japanese population will have shed a massive 38 million people, falling from 128 million to around 90 million.

The Japanese have stopped replacing themselves. The average woman has just 1.27 babies, and the number is falling. It ranks 184 out of 195 countries in the UN fertility ranking table.

The country seems to be going off sexual reproduction altogether. In a recent government survey, an incredible one in three Japanese males aged between 16 and 19 said they weren't interested in sex, or were actively averse.

If demographics are destiny, Japan is doomed. Once a population starts declining, it is very hard to reverse, except perhaps by immigration, which all those conservative, elderly Japanese people will resist.

1.21% anyone?
So what will happen to all those people? They will stop working, claim pensions, and die. They will also do a rather surprising thing. They will stop saving, and start spending. After all, who would they be saving for? Not their grandchildren, because they might not have any.

And when the Japanese stop saving, who will buy the country's bonds?

Not me, not you. Or at least, not until they yield rather more than 1.21%. Which the heavily indebted Japanese government will be completely unable to afford.

Ouch.

Yer old!
Japan has been living on borrowed time since the late 1980s. As the economic miracle ground to a halt, the country's bankers and politicians refused to restructure or write down bad loans, but borrowed heavily instead in a bid to keep the party going.

When that failed to revive the economy, they borrowed some more money. Deficit spending became the norm, it was funded by the Japanese, and we all pretended this made it sustainable.

Japan has been able to generate so much debt without sparking a major calamity because its borrowing costs have so far been low. When that changes, it could go into shock.

Setting sun
Japan is still the world's fourth biggest exporter, and its exports have been surging lately. It is currently bailing out the euro zone, by pledging to buy more than 20% of AAA-rated bonds issued by the euro zone's new bailout fund.

We need Japan.

But I'm racking my brains to think of another country in history that has willingly let itself die out. Some were destroyed by conquest, others by changing climate, or depleting their resources. But has any country let itself wither and die? Let alone one with such a proud history as Japan?

The lost country
As Japan enters its death spiral, it will hurt the global economy. As the nation's bond yields start rising, Japanese banks, pension funds, and life insurers will send money home to cover their losses, sucking billions out of the global economy.

Asset prices will plunge, and so will stock markets. And I can't see a way out of this.

Here's another worrying thought. China is regularly called "the country that is going to grow old before it grows rich." At some point, it could find itself in the same position as Japan.

But let's just worry about one country at a time. Now, how much have you got invested in Japan?

More from Harvey Jones:

This article has been adapted from our sister site across the pond, Fool U.K. The Motley Fool has a disclosure policy.


Read/Post Comments (10) | Recommend This Article (18)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 29, 2011, at 4:19 PM, FinnMcCoolIRA wrote:

    Maybe it's just payback time?

    To wit:

    WW II (1936)

    The 'Rape of Nanking' (and other places)

    The Batann Death March

    Murdering/torturing Doolittle crews

    Bombing hospitals/orphanages

    Starving/murderng thousands of POWs (and civilians)... etc.

    ....and not paying a sufficient price for the above ...

    What goes around, comes around!

  • Report this Comment On January 29, 2011, at 6:43 PM, matthew2219 wrote:

    I have been hearing doomsday scenarios all my 65 years. None has come true. This country will morph into something else. It will re-invent itself. 90 million people are not going to be a people without a country. Stick to verifiable facts, draw conclusions from them, but avoid these gross oversimplifications of extreme complex dynamics.

  • Report this Comment On January 29, 2011, at 11:11 PM, burrowsx wrote:

    What is most troubling about Japan's problems for Americans is that Ronald Reagan essentially reproduced the zaibatsu financial cartel system through deregulation of various banking systems, and his successors dismantled the Glass-Steagall Act to break down the barriers between investment banks and their clients. Reagan saw the Japan of the 1980's as the world's economic success story. As Palin would put it, how's that workin' for ya, Japan?

  • Report this Comment On January 30, 2011, at 2:04 PM, ET69 wrote:

    To FinnMcColl above?

    Payback? What goes around comes around? O.K.

    What about?

    #1 The American genocide of Native American Indians?

    #2 How about slavery?

    #3. How about ripping off half of Mexico in an effort to expand slavery?

    #4 How about about Perry forcing Japan to trade at gun point when it wanted to stay isolationist?

    How about dropping not 1 but 2 atomic bombs when the government was trying to surrender?

    #5, How about the Mai Lai massacre in Vietnam?

    #6 How about destroying Iraq on the basis of non-existent "weapons of mass destruction"

    Your nothing but a hypocrite and a bigot- yeah what goes around -comes around.

    The question here was economics not your right wing rant.

  • Report this Comment On January 30, 2011, at 3:21 PM, neutrinoman wrote:

    Facts like these are irrefutable answers to the peddlers of Keynesian Kool-Aid: certain well-known bearded Princetonians, who keep getting Japan wrong and try to sell Americans on their faulty theories.

    Reagan didn't repeal Glass-Steagall BTW. Our problems are similar to Japan's in one respect: we're recovering from a monetary bubble aided and abetted by our central bank. But otherwise, we're pretty different.

  • Report this Comment On January 31, 2011, at 12:42 AM, ET69 wrote:

    The author sees no way out and I would tend to agree if we are confining ourselves to a capitalist economic system run in the future just as we do now. History tells us that economic systems either evolve or collapse. They will too.

    Japan leads in nanotechnology and robot development.. Just one example. They are developing robots to essentially take the place of nursing aides in geriatric homes. They will be able to replace an entire category of currently in demand workers without bringing in foreigners and lowering cost at the same time. Working in geriatrics as I do i see this as brilliant.

    Having lived in Japan for many years I can tell you that the drop in population is a blessing! Japan is about the size of California with much more mountains and about 5 times as many people. Believe me they could use some population density reduction. Over population is a huge PROBLEM and liability (look at China and India and Pakistan) and open space is the new idea of wealth.

    Only if you want to maintain antiquated factories that require large amounts of labor do you need an expanding population but robots will do this for them. Technology is what counts and Japan owns about half of the patents in the world

    Lastly if they really want more babies then they can seriously increase the benefits for woman who have a lot of children as they did in the East block in the old Soviet days . It worked well then.

    I also doubt the stats as regards the "Lack of interest in sex" that says 1/3 of young males have no interest in sex. Sex is hard wired in evolution and that is not easily changed. No I think what they are rejecting is all the responsibilities that go with childbirth as they take this very seriously ---unlike too many people in the USA.

    In conclusion, although socialism would make the transition much easier for the Japanese even within the confines of capitalism Japan can resolve these issues successfully.

  • Report this Comment On January 31, 2011, at 4:29 PM, plantoretire1day wrote:

    Harvey Jones

    I must admit you got me with the outrageous title "Japan is dying" and read your article with interest.

    Here is my conclusion, I think you guys are using titles irresponsibly just to catch the eye of the viewer. Some titles have even caused me anxiety in the past. Yes, I read it, but do you want us to make emotional trading decisions or reasonable, well thought out trading decisions? I am starting to read fool's advice with a very skeptical eye and even question your/their motives.

    You went on and on about Japan's doom and gloom, but where was the investing strategy or practical application?

    Actually all of man made governmental systems are on their last leg, some of the reasons are mentioned above. God has his own timetable.

    FinnMCCoolIRA

    This is not the forum for that kind of rant and an unbalanced one at that. No amount of vengence can make up for the loss of life or human suffering, regardless of the perpetrator AND putting the sins of one generation on to the next is not fair or right.

    ET69

    I don't believe in evolution, but thanks for a more balanced perspective. I do hope that the robots will not be replacing human contact with the patient though.

  • Report this Comment On January 31, 2011, at 5:06 PM, ddepperman wrote:

    Actually, population decrease, like having lemons, is a lemonade opportunity!

    The planet's population is going to decline one way or another. Japan does it quietly. But there's always war, pestilence and famine, which may be in our future.

    If Japan wants to reverse its decline then all they have to do is address the problems they are avoiding.

    No country is doing that anywhere in sight.

    Last I heard Russia's pop was in decline. Putie-poot may be trying to reverse this or else he just wants more billiions for himself, not too different from--my misspelling--Burlesq-yoni in old italia.

    Why don't we refocus our vision and stop destroying the planet.

    That would be nice.

    And outtasight.

  • Report this Comment On January 31, 2011, at 9:41 PM, FinnMcCoolIRA wrote:

    @ET69: Responses Follow::

    #1 Imperialism, maybe (common for the time period).

    Genocide, no.

    #2 Slavery! Was this something new or unique to the U.S.? Just took us awhile longer than many to end it (Russia had 'serfdom'/slavery after U.S. ended it.)Read the bible or any other ancient history. Thank the Arabs, Dutch and British for 'modern' slavery.

    #3 It was just a regular war, so what?

    #4 Because some in Japan wanted the open trade, just not the overlords with dictatorial powers.(Shogunate)

    #_ Trying to surrender my foot! There was almost a palace coup d'etat to stop the Hirohito (recorded) acceptance speech. We should not have allowed Hirohito to go unpunished.

    #5 An unauthorized/unsanctioned and isolated incident performed by a scant few soldiers ... it didn't even involve the entire troup.

    #6 We - and the world - found out much later that ther were no WMDs (even though Saddam threatened to use them!). Russia, Britain, Fraance, etc. (even the anti-American U.N. believed there were WMDs!

    "Your nothing but a hypocrite and a bigot- yeah what goes around -comes around."

    I can do ad hominem too: You're a Left wing, anti-American, elitist with a myopic view of history. Feel better now?

    "The question here was economics not your right wing rant."

    All politics are economics - for millenia ... read Marx. Oh, sorry, I'm SURE you have, comrade!

    ****************************************************

    To FinnMcColl above?

    Payback? What goes around comes around? O.K.

    What about?

    #1 The American genocide of Native American Indians?

    #2 How about slavery?

    #3. How about ripping off half of Mexico in an effort to expand slavery?

    #4 How about about Perry forcing Japan to trade at gun point when it wanted to stay isolationist?

    How about dropping not 1 but 2 atomic bombs when the government was trying to surrender?

    #5, How about the Mai Lai massacre in Vietnam?

    #6 How about destroying Iraq on the basis of non-existent "weapons of mass destruction"

    Your nothing but a hypocrite and a bigot- yeah what goes around -comes around.

    The question here was economics not your right wing rant.

  • Report this Comment On January 19, 2014, at 12:59 PM, therearenone wrote:

    As long as the Japanese condone the slaughter of Dolphins and Whales as in Taiji and Antartica, we will never buy another product from a Japanese company or travel anywhere near Japan, this includes: Toyota, Honda, Sony, Jim Beam, etc. They are still an inhumane and barbaric people. I've lost all respect for Japan and their people since watching the Cove and Blackfish.

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