I Think We’re Turning Japanese…Troubling Demographics in U.S. Mirror Japan
at Start of Lost Decade
at Start of Lost Decade
Call me an optimist, but our current economic conditions are starting to look a little less like the Great Depression. Unfortunately though, they’re starting to look a little more like Japan’s Lost Decade…
What makes me say that? A quick look over at the demographics of Japan. Because taking a glance at Japan’s current-day demographics is much like peering into the future of the United States…
Demographic investing can produce phenomenal returns. Investing in a demographic trend would have encouraged someone to buy McDonald’s or Mattel stock in the 1950’s, back when the “baby boomers” were still just babies…or financial services companies in the 1980’s, when they all started buying homes and moving into adulthood.
But it can work the other way too, telling you what to avoid like the plague and when. If my grandfather were alive today, he’d tell me to stay away from the Japanese. But it wouldn’t be because of his latent racism, it’d be because the demographics tell us to stay away.
You Hated These Graphs in School…But This One Makes a World of Difference…
Back in 1950, Japan’s population, as seen on the left side of the chart above, was a lot like a tree. It had a hefty base skewed toward a younger population. In 2005, was a little more evenly distributed. The forecast for 2050, is an elderly-skewed population. It doesn’t just look wobbly, it promises to wreak havoc on government retirement plans.
You see, in 1990 – at the start of the Lost Decade – the number of elderly folks stood at about 19% of the population. Today it’s about 25%. Fast forward to 2009 America, and the number is about where Japan was at 1990, thanks to the start of the retirement of the baby boomers.
Japan originally set its retirement age at 55, but pension and other retirement benefits didn’t kick in until 60. The Japanese government raised the benefit age gradually and scaled back benefits. It’s something the United States has done with Social Security.
With age, there tends to come a more conservative outlook, in other words, a higher desire for low-risk assets like cash relative to bonds. So naturally, the increase in money supply that Japan undertook during the Lost Decade—replete with interest rates that were practically free—made it possibly to kick the aging population issue down the road.
So that’s a component of Japan’s Lost Decade of economic growth: the same demographic issues that are just now becoming apparent in the U.S.
And the lesson for sovereign investors?
The best investment opportunities lie in countries with a younger, more vibrant population, unshackled with debt and nimble in a global economy. Otherwise it’s open season for short-sellers…
Editor of The Credit Crunch Short Report