Markets | the analyst

The grim reapers will soon be taking their toll on one of the largest produc-ing economies in the world. A country that was once flourished with good economy and wealth built since the 1950s, are to be obstructed by divine intervention as saturated clusters of old-aged individuals begin to glide their life towards its end. Baby boomers they were, during the post ‘world war two’ era and the high surge of the working population has contributed significantly to the productivity and innovation of the industries in Japan. Unfortunately, they have officially reached 65 and over. With the birth rates crumbling throughout the 20th century, the distri-bution of the population by age group has been brought to a reverse. Japan, now declared as the fastest-ageing society on Earth by having the highest median age (44) and life expectancy (83), is heading into a demographic of the unknown. In the next 40 years its population, currently 127 million, is expected to fall by 38 million. By 2050, four out of ten Japanese will be over 65. What will the fate of Japan be as a foreseen devastative tragedy starts to unravel in a few decades to come? Will the ‘Democratic Party Of Japan’ (DPJ) that triumphed over the one-party rule at the 2009 elections be a new hope of a resolution to this upcoming dis-aster? Will the newly appointed PM Mr. Naoto Kan be able to rhetorically

incite the Japanese citizens to take drastic actions before the country col-lapses into the depths of the abyss?The first concern, however, would be the dear pensioners siphoning out sub-stantial sums of expenditure from the public finances. This does not fare well with their colossal public debt-to-GDP

ratio (190%), which has risen consid-erably to be the highest in the world. The most significant cause would be government bonds where the state has for years relied on domestic savers to buy them. However, as the negative growth in the working population does not seem to be in favour of the govern-ment, the citizens will have less money to invest in municipal bonds. Another problem that seems to be more imme-diate would be deflation. Falling prices may have helped the government by providing its bondholders with invisible gains, but in other ways deflation is a menace. It pushes the debt-to-GDP ratio inexorably higher. As expecta-tions of deflation become entrenched, 35% of Japanese expect prices to be the same or lower in five years’ time. Hence, this causes continual depres-sion on the country’s consumption and eradicates expenditure at the bot-tom line. On top of that, Japan cannot count on foreign demand being strong enough for it to sustain export-led growth. Without a stronger domestic economy, growth will not generate enough tax revenue to reduce the debt. One ominous sign is that in the 2010 budget implemented on April 1st, borrowing, at ¥44 trillion ($468 billion), is for the first time forecast to exceed tax revenues, at ¥37 trillion. This brings a conclusion that with Japan digging it-self deeper into the hell of debts, mem-bers from the 1947-49 baby boom gen-eration hitting 65 might turn out to be a nightmare for the country. Hence, a resort in rising retirement age would be a point of resolution as it alleviates pension costs relieving public finances.To contrast on the economy level of

the current and the future, a great dif-ference would have been obvious with the shrink in population of Japan. For several decades after the Second World War it was a ‘miracle boom’ for Japan’s economy as a new generation of workers entered the labour force. However, when Shidzue Kato, a Japa-

nese of the 20th century, pioneered the birth control movement by forcing a male-dominated parliament to legis-late for easier birth control, condoms became so vastly available that halved the birth rates in the decade from 1947-57. Hence, this arises to fewer young mouths feeding on rising salaries, thanks to the seniority-based system under which pays are automatically increased with age. As the working-age population rose from 50 million in 1950 to 75 million in 1975, savings boomed and companies channeled them into breakneck growth. That was more or less the pattern of Japan’s economy into the 1990s, even beyond the bursting of the financial bubble in 1990. However, as it reaches 1995, the economy started to lose its steam with Japan’s working population hitting the paramount of 87 million. Since then it has begun to fall sharply. Alternative measures have been taking to keep the economy growth steady though. As labour is one of the two main sourc-es of economy growth, the falling in working-age population would only pro-pose an increase in output per worker to maintain its production level. There

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MARKETSThe Demographic Vortex of Japan

By Yiing Ren Ng

Markets | the analyst

are ways to ease the demographic strains, such as employing more wom-en, older people or even foreigners. But if productivity does not increase enough to counteract a shrinking workforce, output and living standards will eventually decline for the country.To question about the birth rates, what has been the causal of the mess in suppressed child birth as a whole? To date, Japan’s birth rates are 1.4 children per woman which is the 2nd lowest in the rich world countries after South Korea. Back in the 1950s, there was a plummet in birth rates due to the vast industrialization where Japan has taken itself into but it started falling again dur-ing the 1980s. Without even a self-im-posed one-child policy like China, Japan was having a birth rate of 1.5 children at that time, which has not been taken much action until the 1970s. The gov-ernment has bolstered child benefits and provided day care centres to spur a growth in the population size but birth rates have still remained to be stub-bornly low. Only few reasons could be due to this subsidence, which one of it is wedlock. As it is a common law of only having children after marriage in Asia-Pacific regions, the people are subdued to the fact that marriages can be very costly. Hence, this appears to be a limiting factor of causing people to take a precautious step before com-mitting themselves into one that puts off the importance of immediate step after. Moreover, the seniority-based system of paid salaries is leaving a sub-stantial number of youths living under the same roof as their parents to feed on their pensions. It is a good life for them indeed, being called as ‘parasite singles’ where they can save up on rents and spend on foreign travel and luxury goods instead. Another reason owing to plunging birth rates would be the employment rates among women after having children that would seem discouraging especially in private sec-tors. They are not provided with ma-ternity benefits and help with childcare as much as civil servants in the govern-ment sector. As a result, mothers are forced into lower paid or part-time jobs to fill their time, which incurs a higher opportunity cost of entering into moth-

ever, with pretty much a long to-do list that awaits them, the people are not keen of a change as both the elderly and youths are comfortable with cur-rent living standards that do not seem to be troubling them. It is only when the situation becomes intolerable and uncontrollable would the country as a whole do something about the demo-graphic threats in years to come.

The recent run up of the commodi-ties index is no news to investors, and it should not be a surprise either considering the recent spur of infla-tionary and credit fears in addition to weaker USD. For the fiscal year 2010, Cotton outperformed the pack with a wide margin. As of December 23, 2010, cotton prices nearly doubled, in-creasing 97% from year to date, trad-ing at $1.418 per pound, while rare metals such as Palladium, Silver, and the all-mighty Gold advanced 84%, 74%, and 25% respectively. Putting things into perspective, the follow-ing chart from finvis.com compares relative movements of major indexes.

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erhood in comparison to a single’s life. To be succinct, there is only so much that the government could do in rais-ing birth rates however as we deepen into a micro-level perspective. Unless some ‘deus-ex-machina’ decides to act upon the people of Japan, only a whip of catastrophe could shock the country out of its state of lethargy and make a radical change for the country’s good.What Japan needs is a cultural revolu-tion. This will cause productivity to arise with more women, older people and immigrants participating in the domes-tic economy. Learning to make the most out of booming markets over-seas would be a plus too. However, for much of the efforts in people making the change workout, there must be a strong perseverance in living through a period of economic decline when its famously comfortable living standards start to fall. Besides that, the workforce will have to become more diverse. By promoting a bigger market for foreign-ers, brains from a wider perspective of the world will help foster the country in producing products that will attract the foreign markets. Furthermore, the gov-ernment should also offer incentives to citizens in consuming more as they progressively get older. Reforms on fi-nancial services and social security are certainly a trick to drawing out savings of elderly people and help rebalance the Japan’s economy once again. How-

The Fluffy Bubble

By Dan Han