What could it mean if developed economies go the way of Japan?
Japanification refers to the process of becoming more like Japan, and no I don’t mean a heightened appreciation of anime and Hello Kitty, as cool as both those things are. I mean the economic environment of developed economies looking more and more like the Japanese economy. Sitting at home you are probably wondering what Japanificiation of the economy could mean for you. The short answer is we don’t know yet. There is no guarantee that other developed economies will go the way of Japan - what we see today are symptoms.
Let’s start with a bit of history. Through the latter half of the 20th century, Japan enjoyed an economic miracle with rapidly increasing GDP per capita. Japan was the second-largest economy by the mid-90s, with GDP per capita about 50% higher than that of the United States.
Since then growth has mostly flatlined.
In the early 1990’s a massive asset bubble in property and the stock market burst, wiping out the balance sheets of individuals and corporates alike. The working-age population, which peaked in 1995, has since been in decline. The Bank of Japan has battled Japan’s “deflationary mindset” ever since, completely failing to achieve sustained inflation, let alone meet its inflation target of 2.0%. Meanwhile, The Japanese Government, through various attempts to stimulate the economy, has racked up more debt than it can ever reasonably expect to repay.
This should sound familiar when considering other developed economies
Many developed economies today have similar traits to mid-90s Japan. Even prior to COVID-19, global debt had already reached levels where the prospect of repayment was rather hypothetical. Japanese government debt to GDP is about 237%, for perspective the United States is around 107%. Working-age populations in the United States, and through much of the Eurozone, also appear to have peaked as a share of the total population. Inflation has been hard to find with both the ECB and Federal Reserve failing to meet their targets. Asset prices are at extreme levels and getting more so, but it's not clear today that markets have “priced in” Japan-style growth rates, as we find ourselves with equity markets at levels comparable to where they were pre-COVID.
Is Japanification really a problem?
Yes and no, depending on your perspective. Japan’s GDP growth may be sluggish, but GDP per capita has continued to grow at levels comparable to other developed nations. For workers the labour market, although not perfect, is also surprisingly good. If you have a pulse, you can find work of some kind.
Even the debt has a silver lining - it is impossible for Governments which issue in the local currency to default, you simply print more money. It’s hard to see what, if any, consequences or constraints there are for simply continuing to print money given low inflation, and that about half of the Japanese Government’s debt is now owned by the Bank of Japan - which itself is 55% owned by the Government. So the Japanese Government basically owns its own debt and can create more at crazy low rates if needed.
On the other hand, Japan’s position is not necessarily sustainable in the long-term. An ever-declining and aging population raise the prospect at some stage of a rather sclerotic society. One where production is either outsourced or automated and a relatively small number of working-age adults must bear an increasingly heavy burden to support living standards. Expect a robot teammate in the workplace of the future.
Beware the zombie apocalypse
What could it mean to have zero (or close to zero) interest rates long term? Financial repression is now the norm in the developed world. Governments and monetary authorities have worked to ensure minimal time value and compensation for lower-risk assets, including term deposits, government bonds. Low rates will mean we all need to save more to fund our retirements (or rely on governments), and take more risk to do so – which suggests lower consumption from the working-age population. Zombie businesses that would fail when debt costs are higher survive on cheap credit.
We need to be careful about blindly walking into an undesirable economic structure. Low-interest rates, proliferating debt and aging populations tend to favour market incumbents. For example, measures taken to reduce the cost of debt and support borrowing have accrued first to already dominant, investment-grade companies, and allowed them to become even stronger. Low growth also makes it harder for new, smaller companies to identify market opportunities and grow larger. Don’t believe me? Consider that since 2009 only 37 companies have been removed from Japan’s largest stock index, the Nikkei 225. By comparison, the S&P 500 averages over 20 changes every year.
Put another way, of the ten largest companies in Japan in 1995 by revenue, five still remain in that list (think organisations like Toyota and Mitsubishi). Wouldn’t it be a bit boring to see Apple, Microsoft, Amazon, Facebook and Google as the world’s largest companies in 2045?
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