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Jan 29, 20204 min read

Japanification

By Ichiro Suzuki


It was called the Japan disease prior to the global financial crisis. The Japanese economy was mired in persistent slow or zero growth and zero or negative inflation rates that could not be lifted by zero or lower-bound interest rates. It was originally thought to have been attributed to weak policy responses from the Japanese authorities, such as taking too much time to clean up the banking system and keeping interest rates too high for too long. Yes, Japanese authorities obviously did not do things right. Since then, however, it was found that structural forces that drive down growth and inflation outweigh policy makers’ ability to cope. That is why since the GFC this syndrome is hitting not only the four Asian Tigers mentioned in the attached article, but also the global economy as a whole, essentially for the following reasons.

First, there is aging population. Japan’s population has been already aging for a generation and its population has been declining for several years. An average Japanese woman gives birth to 1.4 babies, we’ll below 2.1 that is required to maintain the population. On this, the majority of the Asian countries are not much better than Japan, and sometimes worse. In South Korea, the birth rate is already below 1.0. Even in the United States, the birth rate has fallen to 1.8 in recent years from the pre-GFC rate of 2.1. Lower population growth reduces economic growth rates through weak consumption that accounts for well over half of the economy. (Consumption is 70% of U.S. GDP and 60% in Japan.) East Asia is getting older faster than the rest of the world. Once touted as the world’s growth engine, the region is now ahead of the rest of the world in aging of population.

Second. lower interest rates do not stimulate consumption since the reason behind weak demand is an increasing number of people who do not have to spend much. Having already owned a house, furniture, cars, and other big ticket items, older people do not have to spend too much in goods though they tend to have money. (They do spend money on services that give them experiences, such as cruise ship trips, more time on golf courses, etc.) Anyway, they don’t spend money in response to tax cuts or cheap money (lower interest rates).

Third, the household sector is already carrying too much debt to spend a great deal more money even if interest rates are very low. In the post-GFC world, Fed chairman Ben Bernanke kept shaking his head on persistently weak consumption that failed to respond to the Fed’s super aggressive monetary policy (QEs). Household balance sheets were already stretched by the time Mr. Bernanke took the helm at the Fed. The household sector went into a balance sheet reconstruction phase as the crisis hit the economy, and people were not able to borrow to spend even if interest rate were so low.

Fourth, interest rates are the price of money that looks into future demand for it. Population no longer grows in many parts of the world and the only regions where it still grows is the Middle East of Africa that have been plagued with instability. The outlook of demand for money is not great. The financial markets are giving appropriate pricing for money in this demand outlook. The highest bond yield for 10 years is found in the U.S., where growth outlook is stronger than the rest of the world, but it is only 1.8% at present. Borrowing costs for the government are already zero or lower in Japan, Switzerland and Germany and do not offer much higher yields. Neither is the rest of the developed world. 

Fifit, Trump's trade war against China is hitting East Asia hard, because the region has been thriving on trade more than anywhere else. Singapore’s growth rate was brought down to almost nothing. While we don’t know how the Sino - American trade war goes on in the near future, we can be reasonably sure that the age of relentless trade growth is behind us. That’s not good for the global economy, and especially for Asia.

China is no exception to what lies ahead for East Asia in general. China still posts a growth rate of 6%, far higher than the rest of the region in general, with the exception of Vietnam. However, China’s growth rate is less than half of what it once was a decade ago, and continues to decelerate, as the working age population has already peaked out. China has accumulated far too much debt for a country whose per capita income is $10,000. While Beijing’s balance sheet still remains healthy, local governments, the household sector and the corporate sector are reportedly quite stretched, having been addicted to debt-financed growth. Local governments’ predicament could translate into the health of Beijing down the road. A chance of sudden rise of interest rates globally remains low, and China would not get crushed by suddenly higher rates. Thad said, the road ahead would be tougher than what the country has come through, in an environment of slowing growth, slowly falling working age population, low inflation and a mountain of debt.

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