Japan ageing crisis offers glimpse of future
After several years of hiding in the shadows of the Chinese economic miracle, Japan has been catapulted back into the limelight following the election in December of the Liberal Democrat Party, with Shinzo Abe as Prime Minister.
As promised in the election campaign, Abe is attempting to halt Japan's 15 years of crippling deflation by targeting a 2 per cent inflation rate. To achieve this goal he has turned the fiscal burners on and strong-armed the Bank of Japan into printing unlimited yen.
Abe's policies have gravitas in financial circles. Since early November, when markets realised he would be elected, the Japanese stockmarket has hurtled 30 per cent higher while the yen has depreciated about 15 per cent against the greenback and the Aussie dollar.
For years the yen has been the whipping boy of the currency world, with the Japanese government seemingly powerless to stop the appreciation of its currency against its big competitors in the US and Europe. Japan's massive export industry had become uncompetitive, but in the space of just two months it is back in the game.
Why are these events suddenly so important to Australian and other investors around the world? Primarily because Japan is the test case for virtually every other developed and developing country on earth. It is a glimpse of our future. With a median age of 46 for its people, Japan sits only behind the principality of Monaco as the oldest population on earth. If projections are correct, this lead will narrow with its population precipitously growing older and its workforce shrinking in size.
Japan's total population peaked in 2008 at the 128 million mark and is forecast to slump to about 90 million by 2050. Moreover, the working population of people in the 15 to 64 age group peaked between 1990 and 1995 at some 68 per cent of total population. It now sits at 62 per cent. At the same time the proportion of people over 65 has risen from about 14 per cent to 24 per cent of the population. By 2050 the over 65s will be 40 per cent of the total population.
These numbers are frightening. In its 18 years of a shrinking working population and deflation, Japan's government has tried to stimulate economic growth by running massive fiscal deficits and printing yen. It invented quantitative easing (QE) and despite QE's ineffectiveness, the move has been copied in the US, Britain and more recently the European Union .
Today, Japan has the largest fiscal deficit of any developed country sitting on 230 per cent of gross domestic product. This addiction to debt has been funded by high levels of domestic savings. From the 1970s to the 1990s the average Japanese citizen saved about 15 per cent of income, making it possible for the government to keep racking up deficits year in year out.
Critically, these dynamics are about to change. With the Japanese population growing older at a rapid clip, private savings have fallen to just 3 per cent of incomes and by 2015 people are forecast to start dipping into their savings. Abe is acutely aware of this situation and is desperate to crank up the economy to offset this pending disaster.
The US based investor Kyle Bass and the Harvard economist Martin Feldstein have both warned about the perils of Abe's policies. They believe targeting 2 per cent inflation will drive Japanese interest rates higher, making it near impossible for the government to meet its debt funding. At present, the interest bill on the government debt eats up 25 per cent of all tax receipts.
A spike in interest rates would send this percentage soaring. Bass claims Abe is not helping the economy out of its funk but simply bringing forward the day of reckoning when the Japanese government defaults on its debt.
Abe's bold attempt to avert disaster must be closely analysed by investors and public officials. Australia's median age is about 38 years but forecasts put this number at 45 years, the same as Japan, somewhere between 2040 and 2050. The US is in a slightly better position but is heading down the same path, while the main European countries are only a decade behind Japan.
Australia must not go down the same path as Japan of trying to prop up economic growth via an expansionary fiscal policy.
As a nation it must continue to replenish the working population and try to keep it in the realms of 65 per cent of the overall population. Otherwise, it will fall into the same trap as the Japanese and more recently the main European nations of increasing our fiscal deficit to maintain the standard of living while the private community saves for retirement.
Another important step for the domestic economy is to heighten productivity levels. Increased productivity allows economies to grow at healthy rates without putting upward pressure on inflation and avoids Keynesian-like intervention through regular government deficits.
Australian productivity levels have dropped in relative terms over the last decade, a point not lost on our business leaders.
Unfortunately, the business community blames this unnerving trend on the government rather than sharing the responsibility.
Australian business has been slow to react to many trends since the global financial crisis, letting everyone down including their own shareholders.
matthewjkidman@gmail.com
Frequently Asked Questions about this Article…
Abenomics refers to the package of policies introduced by Shinzo Abe aimed at ending Japan's long deflation and hitting a 2% inflation target. Abe combined large fiscal stimulus with pressure on the Bank of Japan to print yen (a form of quantitative easing). Since markets realised he would be elected, the article notes the Japanese stockmarket rose about 30% while the yen weakened roughly 15% against the US dollar and the Australian dollar.
Japan is one of the world's oldest populations (median age about 46). Its total population peaked at 128 million in 2008 and is forecast to fall to around 90 million by 2050. The working-age share has fallen from about 68% to 62%, while people over 65 have risen from ~14% to 24% (projected to reach 40% by 2050). These trends shrink the workforce, lower private savings, and increase fiscal pressures—factors that can weigh on growth, corporate profits and government debt sustainability.
Quantitative easing (QE) is central bank money creation to buy assets and stimulate the economy. The article points out Japan effectively invented QE and, despite its limited success in ending Japan's long deflation, its approach has been copied by the US, UK and the EU. Japan's experience warns that QE alone may not resolve deep structural problems like ageing populations and weak productivity.
Economists such as Kyle Bass and Martin Feldstein warn that forcing inflation toward 2% could push interest rates higher. Japan already has a very large government debt burden—about 230% of GDP—and interest payments currently consume roughly 25% of tax receipts. A rise in rates would raise debt servicing costs sharply and could make it much harder for the government to fund its debt.
Japan's large deficits have historically been financed by high domestic savings—Japanese households once saved around 15% of income. The article notes private savings have fallen to about 3% of incomes and are expected to be drawn down as the population ages. With fewer domestic savers, funding huge deficits (Japan's is about 230% of GDP) becomes riskier for investors and policymakers.
The article suggests Australian investors and policymakers should watch Japan as a cautionary example. Australia’s median age is about 38 but is forecast to reach about 45 by 2040–2050. To avoid Japan’s path, Australia needs to maintain or grow its working population and boost productivity rather than rely excessively on expansionary fiscal policy that increases deficits while private savings fall.
A weaker yen makes Japanese exports more competitive overseas. The article notes the yen depreciated about 15% after Abe’s election, and Japan’s large export sector regained competitiveness quickly. For investors, currency moves can materially affect multinational company earnings, export-led sectors and the attractiveness of Japanese equities versus foreign assets.
Higher productivity lets an economy grow without stoking inflation and reduces the need for repeated government deficits. The article highlights that Australia’s productivity has fallen in relative terms over the last decade and that businesses have been slow to adapt. Investors should watch productivity trends, corporate efficiency improvements and policy measures that support innovation and workforce participation as indicators of healthier long‑term growth.
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