Monday, October 5, 2009

Japan rally not about the long-run

The ticking of age is louder in Japan then in most other countries. The second largest economy will be in permanent decline not because of poor economics but because people are disappearing. The currency yen rally has more to do with tax policy and cyclical rate differences than with a positive signal about the health of the Japanese economy. The Nikkei has rallied like many other G10 countries but the demographics of Japan are working against their long-term gain.

Japan's population is peaking and will shrink by 20% in less than 40 years. In less than 50 years, over a third of all Japanese will be older than 65 years.

The gross debt to GDP number is at 217% (there is double counting so hat the actually debt/GDP is closer to 100%) and we are worried about the US at only 81.2%. The real problem comes if the interest rates on JGB's are actually higher than growth. The debt would not be sustainable. This more likely if there is a shrinking population. This is an issue that cannot be solved with exports because they still only represent 15-20% of GDP and the world is becoming more competitive with countries that have less structural impediments to growth.

Enjoy the Japanese rally now because the long-run demographics are not yen positive.

No comments: