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Monday
Sep172012

Japan’s Slow-Motion Tsunami

What got lost in the escalating Japan-China scuffle was an unassuming national holiday in Japan on Monday that symbolizes in the most respectful manner the slow-motion economic tsunami rolling over the country: “Respect for the Aged Day.”

The day is always preceded by a flurry of announcements related to aging. On Friday, the Ministry of Health, Labor, and Welfare released the latest data points of a trend that has persisted for 42 years: the growing number of Japanese over 100 years old. It was gradual at first. In 1963, when the data series was started, there were only 163 centenarians. It took 35 years—to 1998—to add 10,000. Then it accelerated, taking five years to add the next 10,000, four years to add another 10,000, and two years to add the next, bringing the total to 40,000 centenarians by 2009. As of this weekend, there were 51,376 centenarians—3,620 more than last year.

And this despite the earthquake and tsunami that killed 15,870 people; 2,814 remain unaccounted for. The tsunami, responsible for the vast majority of the fatalities, had hit the elderly the worst: 56% of those who died were 65 or older; three-quarters of those missing were over 60—the generation left behind in small towns and fishing villages along the coast as young people had migrated to the cities. The victims hadn’t been able to flee or hadn’t been quick enough.

Due to the devastating impact of the tsunami on the elderly, life expectancy dropped in 2011: for women by 0.4 years to 85.9 years, pushing them down to second place behind Hong Kong; and for men by a notch to 79.4 years, equal to Italy and just below Switzerland. By now, 24.1% of the population is over 65. In 1965, 9.1 workers supported each retiree. By 2050, there will be one worker for each retiree.

These demographic trends are on collision course with a peerless debt nightmare. By March 2013, the end of the current fiscal year, gross national debt will surpass one quadrillion yen, or $14 trillion, a mind-boggling 240% of GDP. Of its current outlays, 56% have to be borrowed. Budget cuts? Nope. The budget increased. Largest item: Social Security, at 29%.

Sole heroic effort to address the problem? The unpopular consumption tax increase from the current 5% to 8% by April 2014 and to 10% by October 2015. Alas, it’s a joke; it won’t kick in unless GDP grows at least 2% per year—and that has, given the current economic malaise and declining population, practically no chance of happening.

So why does the government run up these gigantic deficits to subsidize Japan, Inc. and to fund the welfare state, boondoggles, bridges to nowhere, and worthwhile infrastructure projects? Because it can.

Borrowing at near zero cost has been its hallmark for years. Due to Japan’s institutional setup and cohesive insular psychology, the government has been able to sell 95% of its debt within Japan. Individuals directly or indirectly hold over 50%. Government-owned or controlled institutions hold over 40%. Among them: the Government Pension Investment Fund, one of the largest pension funds in the world; the government-owned Post Bank, the largest deposit holder in the world; and financial institutions the government can lean on. Then there is the busy Bank of Japan. Foreigners hold only 5%, for decorative purposes. This system hermetically protects the government from any discipline that credit markets could otherwise impose.

But in Japan, you see groomed streets and gleaming public transportation infrastructure. You see innovation, energy, packed trains, and crowds milling around. You see urban renewal where whole city blocks of dilapidated buildings were replaced with new structures. Debt funding is a great thing. For a while. As long as the Japanese believe that the government can meet its obligations, and for as long as the country doesn’t run low on investors.

Which is about to happen. The younger generations are less numerous and earn less, and thus pay less in taxes, than their predecessor generations. They buy fewer houses, and when they buy, it’s later in life. They have to work harder for less. They have no money to save, and they no longer have any illusions that the pension system will be there for them.

Unlike booms and busts, demographic changes advance at a glacial pace. But the first waves of that slow-motion tsunami have already reached the land. This time, it’s the younger generations who are paying the price. But it remains uncertain for how long and to what extent they’re willing and able to pay it—to prop up the system and allow their elders to enjoy their long retirement years.

Another country sinking ever deeper into a fiscal and economic quagmire is Argentina, whose policies are taking on desperate and ugly forms. Read....  Not An Effective Capital Control, Import Control, Or Tax Measure – But An Effective People Control, by stilettos-on-the-ground economist Bianca Fernet.

And here is my book about Japan—a “funny as hell nonfiction book about wanderlust and traveling abroad,” a reader tweeted. “Great read ... what a fantastic finish,” another one tweeted. Read the first few chapters for free.... BIG LIKE: CASCADE INTO AN ODYSSEY, at Amazon.

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Reader Comments (5)

<i>This system hermetically protects the government from any discipline that credit markets could otherwise impose<i/>

This system has a name, it's called <i>sovereignty<i/>.
September 17, 2012 | Unregistered CommenterBill J
Hi Wolf,
I note that Sober Look is not on your blog list, but I would highly recommend it. He did a great post on this subject on August 8th at http://soberlook.com/2012/08/bnp-paribas-japans-fiscal-problems.html

"But financing fiscal deficits using private sector savings alone is starting to become hard. ... the abnormal situation of squeezing funds from drawing down capital stock (negative net private investment) has been observed. Could Japan be reaching its limit (critical mass)?"

Regards,
Blank
September 17, 2012 | Unregistered Commenterblankfiend
Blank - I just linked one of Sober Look's articles (Further Reading). I'll add him to my list. Thanks.
September 17, 2012 | Registered CommenterWolf Richter
Are you considering increased immigration? If the country has great infrastructure, declining population, and almost no immigration, I would think allowing more immigration into their beautiful country would postpone a lot of the problems you predict.
September 18, 2012 | Unregistered CommenterBarry
Barry - Some people, especially economists, think so. But the urban areas of Japan are very crowded. Apartments are small to tiny. Commuter trains are packed during rush hour to a degree that is hard to imagine for Americans. And commutes for people in the suburbs can be long. The current demographic trends -- they will play out very slowly -- will eventually alleviate some of these issues. Easing the living conditions in places like Tokyo and reducing commute times would be a good thing for the people. Also Japan doesn't suffer from a shortage of labor per se (though some jobs may be hard to fill), so bringing in more immigrants might contribute to a rise in unemployment and lower wages.

If Japan didn't have to struggle with its debt, future obligations, and out-of-whack budget, the demographic shifts wouldn't be much of a problem. And some day, when conditions are better and the future less somber, they may reverse.

On the other hand, Japan's immigration policies are a fiasco by Western standards, and much ink has been spilled on that topic.
September 18, 2012 | Registered CommenterWolf Richter

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