Godzilla Will Come Out of Tokyo Bay Before Japan Rebounds

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Let's talk Japan.

Every year some analyst comes out with a variation of the story that Japan is about to rebound.

Usually the argument goes something like this: Japanese markets are impossibly cheap and the central bank will be there to prevent a catastrophe.

Or sometimes there is another variation of the Cinderella story.

Either way, don't hold your breath. Japan posted its first trade deficit since 1980 last year and the big trade surpluses needed to drive the Nikkei back to its glory days are over.

At best, Japan is going to see balanced trade figures or a small surplus in the years ahead. It won't be enough.

If you're not familiar with what a trade deficit is, here's what you need to know: Japan imported $32 billion worth of stuff more than it exported for the first time in 31 years.

Fighting the Demographic Tide

Critics say there are mitigating factors behind the figures and they're right.

Against the backdrop of one of the world's fastest aging populations, one of the lowest birth rates on the planet, a renewed reliance on foreign energy, and a yen that is so expensive that Japanese corporations are offshoring production, it won't be long before the country eventually plows through its savings.

So $32 billion is just the beginning…

In fact, we are more likely to see Godzilla walk out of Tokyo Bay than we are to witness a return to Japan's halcyon days.

Worse, I believe that within the next five years, Japan will long for the good old days when the trade deficit was merely $32 billion, instead of $100 billion, $200 billion or worse.

Not one of the things I've just mentioned – that the critics cite as short-term influences – are anything but continuations of much longer-term trends. Nearly all of them are being driven by Japan's declining population.

You may not know this, but Japan's population is projected to shrink by 30% by 2060. That means the total population will go from 128 million people today to only 87 million people in less than 50 years.

That's hard to imagine since Japan is one of the most densely populated countries on the planet. But the effects are already visible.

In my neighborhood in Kyoto, for example, we see abandoned houses that fall in on themselves after people die and there are no longer any other family members to live there. We see schools that are shut down in the region because there are no kids to attend them.

We're also seeing companies shuttered because there are no markets for their products, including my wife's family kimono business, which closed after 300 years in existence.

Simply put, you just can't grow a population or its stock markets without people.

Japan also has no immigration policy to speak of, so there is no means of replacing the "silvers," or senior workers, who are leaving their productive years behind them.

By 2060 the number of people who are 65 or older is going to double. At the same time, the number of people in the workforce between 15 and 65 is going to shrink to less than 50% of the total population.

By 2050, there will be 75 retirees for every 100 workers. By comparison, in the United States in 2050 there will be about 32 retirees per 100 workers.

Nearly one in five Japanese is aged 65 or older...
Figure 1: Source: mtholyoke.edu

You'd think Japan could get "busy" and produce more children but even that's problematic. The country has one of the lowest birthrates on the planet. Many young Japanese simply don't want romance — let alone children.

In fact, many Japanese don't even want sex.

As reported by CNBC, one AFPstudy reported that 36.1% of teenage boys between the ages of 16 and 19 have no interest in sex. That study in 2010 reflected results that were double the 17.5% reported only two years earlier. Girls are even worse, with more than 59% in the same age group reporting no interest.

Things are so bad according to one study I've seen, that at the current birth rate the last Japanese person will be born 953 years from now.

Game Over For Japan?

Critics challenge this assumption, arguing that somehow Japan's hyper-aged will reinvigorate the economy in an orgy of retirement spending and consumption.

That depends on generous pensions and an intact financial system – neither of which Japan has at the moment.

Japan's debt stands at 200% – 253% of GDP, depending on which studies you read, and is headed in the wrong direction. In fact, it looks like a ski jump that's three times our own debt burden.

headed in the wrong direction

Senior citizens I know are doing everything they can to hang onto their jobs for as long as they can.

As a result, there is literally nowhere for younger workers to go… except into low value "arubaito" or part-time work with no benefits, no promotions and very little economic value to contribute to Japan's recovery.

My nephew, for example, struggled for years in such a job before getting training and finding work as a mechanic for Mazda.

To be fair, Japanese citizens purchase approximately 95% of Japanese debt. That's why the country has been able to hang on and has not had its own Greek holiday.

By contrast, we borrow about 50% of our money as a nation from overseas, and we're dangerously close to our own version of Greece's meltdown.

But as the number of retirees rises and the number of workers falls, the Japanese government is going to have challenges maintaining this internal funding capacity.

At some point – either because there are not enough debt buyers or rates rise too high – they'll have to turn to external creditors and interest rates that could easily be double the 1.5% the Japanese government pays lenders now.

At that point, debt payments would consume more than half of all government revenue according to The Atlantic.

Devastating Decline
And then it's game over.

So what's an investor to do? Well for one thing, I sure as hell wouldn't invest in Japan on anything other than an extremely short-term basis.

Despite the fact that trade deficit numbers may ping-pong back into positive territory in the months ahead, there's no reversing the current long-term trend.

The notion that the Nikkei is somehow undervalued is naïve if you do not take the population and its effect on debt into account.

While it is true there may be short bursts of growth, there's no ignoring the fact that the bellwether index is trading at 8,802.51, or 77% below the high it achieved in 1990 and 12% below where it started in 1984.

With very few exceptions, money invested in Japan is going to get trapped there.

That's why, unless you've got money to burn, you can say "sayonara" to Japan.

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About the Author

Keith Fitz-Gerald has been the Chief Investment Strategist for the Money Morning team since 2007. He's a seasoned market analyst with decades of experience, and a highly accurate track record. Keith regularly travels the world in search of investment opportunities others don't yet see or understand. In addition to heading The Money Map Report, Keith runs The Geiger Index, a reliable, emotion-free guide to making big money and avoiding losses, and Strike Force, which aims to get in, target gains, and get out clean. In his weekly Total Wealth, Keith has broken down his 30-plus years of success into three parts: Trends, Risk Assessment, and Tactics – meaning the exact techniques for making money. Sign up is free at totalwealthresearch.com.

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  1. Gottfried Bach | February 2, 2012

    Keith:
    your analysis of Japan is most interesting and useful – and sad and scary!
    I would appreciate it if you could also share your view on the JPY: short – medium – long term!
    It's hard to understand why it is so strong.
    Thank you and kind regards, G Bach

    • Jeff | February 4, 2012

      I t may be that the yen is not so high as the other currencies are so low….

  2. jrj90620 | February 2, 2012

    At least they aren't participating in a Ponzi scheme,like the U.S.,where you need continuing population growth to support each retired generation.I don't know if unlimited population growth is great for people.Not likely.Maybe Japan will benefit from a lower number of people if it can use robots or other ways of increasing output,not requiring people.

    • 80sogre | February 3, 2012

      if robot labor was cheaper than human workers, they would have already begun going down that road. the more sophisticated bots are in the 2 million dollar region. then you need human specialist ( getting paid professional rates ) to maintain them. licensing fees, insurances ETc. of course having a unit that can work 24 / 7 at faster rate sounds profitable. i don't think they will have that kind of money for investment again. not in our life time.

      the US is in a more terrifying state than this, Hollywood and high flying corporate America playing big fish with borrowed money they will never be able to repay.

  3. George | February 2, 2012

    JPY currency is roughly 35% stronger against USD in past few years than it was around the 2000-2003 period when I first deposited money there. How long do you think that's going to last before JPY tanks and starts sliding?

  4. Jude | February 2, 2012

    Fantastic stats. Can you also detail the import stats for the last 5 years. Understand from local sources that Tsunami has been a major factor for their $32 Mill import. Thanks Jude

  5. dasmithjones | February 2, 2012

    Sad. I lived in Japan from 1979 to 1982 in Minami-Rinken near Yamato-Shi.
    Absolutely loved it and the people and would love to go back there!

  6. David Mortimer | February 2, 2012

    The closing of a 300 year kimono business is a poignant reminder that the forces of nature limit the growth of wealth in any closed border country. High living standards and educated females ensure falling birth rates. Here in Australia immigration is saving us, as is borderless Europe saving the UK, and illegal immigration saving the USA and some other parts of Europe. Never has economics and sex been so entwined. No. Let's not say never, but you get my drift.

  7. JM | February 3, 2012

    The Yen is so strong because the underlying savings of the nation is holding it up. Once the Japanese Government changes its regulatory policy on taxes, these savings will then be spent and spur the economy even further, which will then lead into a cresendo of a collapse for the Yen as the country will hold no wealth accept debt. But that will allow Japan to re-engineer itself, just like a big corporation, and once that has occured, the rising Sun will shine!

    • Jeff | February 4, 2012

      I live in Japan now but will escape in 2013 and am looking to transfer my yen to New Zealand while it is still high against the kiwi dollar . The process of change will be painful but necessary .
      The current government is fighting to raise taxes which it will no doubt spend unwisely in various stimulations and other futile efforts .

  8. Robert | February 5, 2012

    I live in Okinawa, Japan. Things appear to be better here than the states. The only thing I hate is the social retirement insurance that is deducted from my paycheck every month about 10 percent. I have seen some small businesses closed down, especially in the down town areas, but nothing like the states. Wal-mart as killed small businesses in every state. Things are constantly being rebuilt and new restaurant and stores are popping up all the time and food prices are cheaper now than they were 15 years ago.

  9. Steve | February 5, 2012

    By then, JM, Godzilla will have come out of Tokyo Bay.

  10. Joshua Lee | December 13, 2012

    JPY is weakening now this will lead to stocks rising. As long as there are no buyers then surely for those of us under 50 thats a great long term speculative investment. I live in the Japan countryside and many people are losing jobs, the average age of my neighbours is 75! But by gum they are tough! They will keep fighting but a change in the way money is spent is definitely needed. I hear Keiths honesty but will keep buying on the dips but only with 10% exposure. JPY is already declining its all down hill from here! Welcome to Japan! Tax will need to rise but it will be a little too little too late!

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