One of our Demographics School attendees forwarded us two articles we thought we’d pass on:

“The American Who Manages the Decline of a Japanese Hamlet“  Wall Street Journal

“In Aging China, A Change of Course” Washington Post

It’s a week before Christmas, and we can’t help making a comparison here to Charles Dickens’s A Christmas Carol.  In this case, China is Scrooge and Japan is the Ghost of Christmas Yet to Come.

The difference is, unlike Ebenezer Scrooge — who had the ability to change his ways and avoid his unfortunate fate –China’s future cannot be changed.

In comparing China to Scrooge, we are not referring to Chinese labor practices or implying that China’s labor force consists of millions of unfortunate and underpaid Bob Cratchits.   It’s not China’s wages that we consider misery, but rather its birthrate.

Demographics are the future that has already been written, and China’s future looks bleak indeed. But first,let’s look at Japan.  The Wall Street Journal article above tells the story of an American whose job it is to manage the slow death of a small Japanese village.  While one village might not be particularly significant in the grand scheme of things, the same is occurring throughout Japan.  The island, with the exception of a small number of large cities, is slowly being depopulated.  Falling birthrates throughout the post-WWII era have insured that Japan will continue to shrink for the foreseeable, with serious consequences for the stability of the country.

China isn’t to this stage yet.  But after 30 years of the One Child Policy, it is only a matter of time before the day comes.  Even if China were to suddenly reverse the policy — which is unlikely — the damage has already been done.  And, as the Washington Post article recounts, Chinese families have become accustomed to the One Child Policy.  Many simply cannot afford to have a second child even if they wanted one.

So again, unlike Ebenezer Scrooge, it is almost certainly too late for China to change its ways.

Related post: “Some Geopolitical Musings”

Charles Sizemore, CFA

Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy

More bad news from the land of the rising sun.  Deflation in Japan continues across a wide swath of goods and services, even while the country sees some of its highest economic growth rates in years.  Consider this recent Bloomberg post:  Japan Deflation Concern Rises Even as Growth Quickens

Bloomberg writes,

The domestic demand deflator, a measure of price levels that excludes the cost of imports, fell 2.6 percent in the third quarter from a year earlier, the most since 1958, Cabinet Office figures showed yesterday in Tokyo. At the same time, gross domestic product jumped 4.8 percent, the most since early 2007.

Sustained price declines threaten to curtail a corporate- profit rebound that’s already been insufficient to spur a rally in Japan’s shares this quarter.

Read the rest of this entry »

Once in a while, you have a “me too” moment when you see an article that you wish you had written.  Barry Ritholtz posted on of those today: “Worry About Japan, Not America.”

Ritholtz, though he doesn’t cover the demographic angle, is one of the few analysts out there who understands debt deflation and why the effective insolvency of America’s large banks is such a big deal.  The decisions being made today in Washington are, unfortunately, the same that have been made by Japan for nearly two decades now.  Finally, it appears that Japan is reaching the end of the line.  The country may already be to the point where its sovereign debts are unpayable.  What happens when this realization sets in?  What will happen to the yen?  Or to the “carry trade”?  What will happen when the second largest economy in the world “blows up” like a banana republic?

Honestly, we don’t know.  But we may be much closer to finding out than most analysts think.

Charles Sizemore, CFA
Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy

Barron’s relates a description of Japan’s future by a hedge fund manager familiar with the country:

Within 50 years or so…high-tech aircraft will be taking Chinese and American tourists on fly-overs there to view the dilapidated remains of what was once the world’s second-largest economy.  By then, all that survives will be blighted metropolises like Tokyo, populated mostly by the elderly, and decaying, weed-choked highways, bridges and bullet-train right-of-ways, spectral reminders of a once-vibrant society that lost its way.  (From “Is the Sun Setting On Japan?“)

This is a theme that HS Dent has been covering for years, and for good reason.  We see something along these lines befalling parts of Europe and, to a lesser extent, even the United States. (The U.S. will get older, though it will not actually shrink any time soon).  As Barron’s continues, “The old saw about demographics being destiny certainly applies to Japan, which is graying at an alarming rate because of longtime low fertility rates; its post-World War II baby boom petered out almost a decade before America’s ended in the mid-1960s.”

Demographics certainly are destiny; they are the future that has already been written.  And this future, as Japan has proved, is one of less consumer spending and a higher rate of savings.  This — combined with the hangover from a bursting debt bubble — should insure that the U.S. economy will grow at more modest rates in the decade ahead.

Charles Sizemore, CFA

Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy

You have to love the Japanese language — they have a word for pretty much everything.

A fine example is choiwaru oyaji — defined as a middle-aged man who is “slightly bad,” in a recent article.

Everyone knows the type: the naughty old guy in the office who likes to flirt with the receptionist and tell the occasional off-color joke at the water cooler.  He’s not a “dirty old man” per se, but more of a rascally little boy who never fully grew up.  He’s in his 50s but still young at heart, and he takes care of himself — he usually has a good haircut and will generally not be seen in public without a sports jacket and a classy pair of shoes.  He’s certainly no beaten-down, everyman slob like Al Bundy (or Al’s Japanese equivalent).

Give credit to the Japanese for inventing a phrase that encapsulates this mental image! Read the rest of this entry »

Henry Blodget recently interviewed popular financial writer John Mauldin and geopolitical analyst George Friedman (See video).  It is George Friedman’s comments that we find implausible.  We should start by saying that, in general, we like Friedman’s work.  His Stratfor is a fine resource for geopolitical analysis, and he is simply one of the best in the business for what he does.  We’ve quoted Friedman before in the HS Dent Forecast (see March 2009 issue), and even recommended his latest book.

So, we’re going to have to chalk up his recent Japan comments to temporary insanity.  Friedman believes that a debt crisis in Japan will lead to a fundamental shift in the character of the Japanese state.   The pacifist and democratic Japan of the post-WWII era will be replaced with militantly aggressive Japan — essentially a return to Japan’s WWII fascistic past.   In this view, Friedman has drawn the wrong conclusions from history and has in the process absolutely divorced himself from reality.

Yes, the financial crisis of Wiemar Germany led to a new German militarism and to the rise of Adolf Hitler.  All around the world, authoritarian and totalitarian governments rose to power in a similar fashion.  Even recently, in Argentina, the financial crisis led to the rise of Kirchners — hard leftists with an authoritarian bent who are allied to the radical Hugo Chavez.   So, the historical precedent is there.

But where would Hitler have been without his “Brown Shirts,” his young ideological thugs?  It’s difficult to have a militaristic society without a large pool of aggressive young men.   And this is something that Japan is sorely lacking.

Are we to believe that a country in which the median age will be over 50 will take up arms and conquer its neighbors?  According to UN estimates,  Japan’s median age will be 50.6 by 2025.  It’s already 44.7 — nearly a decade older than the United States.

Furthermore, Japan’s population is shrinking!  How can Japan possibly field an army with a population that is greying and shrinking faster than any society in history?  Moreover, given that Japan is largely a country of only children…what parent or grandparent would want to see their only son fight and die in a war?

Had George Friedman asked himself any of these questions, we would hope that he would have reached very different conclusions.  If demographics are destiny, then Japan’s future will not be militarism.

Charles Sizemore, CFA

Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy

Dennis Gartman, of Gartman Letter fame, had some good commentary on Japan’s demographics in his March 20 issue that are worth repeating here.  The Japanese demographic implosion is a topic that we find particularly fascinating.  Here before us, we see a real-time case study in what happens to a modern country with a shrinking and aging population.   In a pre-industrial agrarian society, a shrinking population means fewer mouths to feed and is a boon to those who remain.  But in a modern, consumer-focused economy, population growth is a necessity.  Fewer, increasingly older consumers mean fewer sales.  Fewer workers means fewer people paying income taxes.  A shrinking population also quickly exposes pay-as-you-go social security systems as the Ponzi schemes that they are.   Let us now take a look at Gartman’s interpretation of events: 

We have long argued that Japan has put itself into a horrid place demographically as her birth rate keeps on plunging and as Japan is no longer replicating itself. Things have gotten so bad demographically that the government itself says that Japan’s population shall halve in another 50 years…. At this point, little… indeed it appears nothing… can be done to stop this terrible demographic collapse. We are watching a demographic train wreck happen in very slow, but inexorable motion.

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When going through a stack of papers today, we found a quote by Francisco Guerrera that we clipped out of the Financial Times a few weeks ago.  It’s perhaps even more appropriate today than it was when written:

When commentators warn that a failure by the latest US rescue plan would lead to a “Japanisation” of the financial sector, they are missing the point. It is too late to worry about banks turning into “zombies” - they already are. Crushed under a pile of toxic assets, paralysed by wafer-thin capital cushions and deserted by fearful investors, once-mighty institutions such as Citi and BofA are barely able to perform basic functions such as lending and underwriting.

In fact, the only reason they have not joined Lehman Brothers, Bear Stearns and Washington Mutual on the financial scrapheap is because taxpayers have propped them up with more than $500bn in cash injections and guarantees. 

Very true.  The time for talking about the United States “Turning Japanese,” as the song goes, has passed.  We’re there now, and our demographic trends suggest that we, like Japan in the 1990s, have a Lost Decade in front of us.

John Steele Gordon is a renown and surprisingly entertaining economic historian.  As we write this blog post, his Empire of Wealth , The Epic History of American Economic Power sits prominently on the bookshelf behind us.   Mr. Gordon regularly writes for both Barron’s and the Wall Street Journal, and we found his essay in today’s Journal, “A Short History of the National Debt,” to be well worth the read.

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Deflation has faded as a headline topic over the past month, but it is still alive and well.  This is particularly true in Japan, where deflation has been a nagging concern for the better part of two decades.  Just five months after producer price inflation hit a 27-year high on rising energy and commodity prices, wholesale prices are falling year-over-year.  Consumer prices are also showing weakness.  Stripping out food and energy, Japanese CPI mildly declined in December.  For Japan, this is a scary reminder that the country is still yet to be free of its economic malaise.  Given its shrinking population, domestic consumer demand may never recover.   Read the rest of this entry »