Is the world economy turning Japanese?

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Schroders
Is the world economy turning
Japanese?
Allan Conway, Head of Global Emerging Market Equities
For 25 years Japan has seen low growth, low or negative inflation and low bond yields. Is this malaise spreading? This
note looks at the Japan experience and compares it with the US, Europe and China since the 2008 financial crisis.
“Japanese disease”
Japan enjoyed massive investment after World War 2 as the economy re-industrialised but investment and spending
became over extended. An investment boom led to a debt boom as companies over extrapolated rates of growth into the
future and over invested, mostly financed by debt. An asset bubble ensued in the late 1980s but burst in 1990 weighing on
the economy and growth slowed to near zero by the end of 1992. As the 1990s progressed, Japan became a zero percent
economy with inflation and real interest rates joining growth at around or below zero, where levels have since
approximately stayed.
So, why are its effects still being felt? We have a lot of possible culprits, none of them entirely convincing as sole
explanations. The full answer is probably a combination of effects. See the appendix for a full diagnosis of the ‘’Japanese
disease’’ but in short;
-
Poor policy response; the authorities responded with expansionary monetary and fiscal policy but it was slow to be
implemented and was ineffective.
-
The response to increasing non performing loans was also slow and the ‘’extend and pretend’’ strategy of rolling bad
debts resulted in zombie companies reliant on bank forbearance.
-
Political conservatism weighed on structural reform and little was done to boost productivity and economic growth.
-
The situation was exacerbated by ageing demographics which entrenched spending and investment behaviours.
The chart below shows growth, the GDP deflator (as an inflation measure) and real interest rates. Three year averages are
used to smooth the lines and show the trends better.
Figure 1: 3 year average Japanese growth, inflation and rates
Mar-55
Nov-56
Jul-58
Mar-60
Nov-61
Jul-63
Mar-65
Nov-66
Jul-68
Mar-70
Nov-71
Jul-73
Mar-75
Nov-76
Jul-78
Mar-80
Nov-81
Jul-83
Mar-85
Nov-86
Jul-88
Mar-90
Nov-91
Jul-93
Mar-95
Nov-96
Jul-98
Mar-00
Nov-01
Jul-03
Mar-05
Nov-06
Jul-08
Mar-10
Nov-11
Jul-13
Mar-15
16%
14%
12%
10%
8%
6%
4%
2%
0%
-2%
-4%
Real GDP Growth
Source: Schroders. Haver. Data to December 2015.
GDP Deflator
3 yr average real rates
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Is the world falling into a Japanese malaise?
We look at the US, eurozone and China.
Are we actually seeing the collapse of economic growth that we have seen in Japan? Figure 2 below matches the
eurozone, US and China from just before the global financial crisis to now and compares it with Japan around its own
crisis. For this comparison 2008 = 1990.
Figure 2: Real growth comparison 3 year CAGR
14%
12%
10%
8%
6%
4%
2%
0%
Mar-06
Jul-06
Nov-06
Mar-07
Jul-07
Nov-07
Mar-08
Jul-08
Nov-08
Mar-09
Jul-09
Nov-09
Mar-10
Jul-10
Nov-10
Mar-11
Jul-11
Nov-11
Mar-12
Jul-12
Nov-12
Mar-13
Jul-13
Nov-13
Mar-14
Jul-14
Nov-14
Mar-15
Jul-15
Nov-15
Mar-16
Jul-16
Nov-16
Mar-17
Jul-17
Nov-17
Mar-18
-2%
US
Euro
China
Japan (time shifted*)
Source: Schroders. Haver. Data to 31 December 2015. Please note that CAGR stands for compound annual growth rate.
*Time shifted: Japan data from 1990s shifted to match global fiscal crisis (1990 = 2008).
Slowing growth is clearly a global concern. The pattern of growth in the US and eurozone does look a little different to
Japan’s – with a more rapid collapse and subsequent recovery. But the eurozone area seems to be plumbing even lower
areas of growth than Japan did in the 1990s. China has been slowing continually. If Japan is any sort of model, then the
recovery in Europe and the US will roll over and growth will struggle to recover again.
Figure 3: GDP deflators: 3 year CAGR
Mar-06
Jul-06
Nov-06
Mar-07
Jul-07
Nov-07
Mar-08
Jul-08
Nov-08
Mar-09
Jul-09
Nov-09
Mar-10
Jul-10
Nov-10
Mar-11
Jul-11
Nov-11
Mar-12
Jul-12
Nov-12
Mar-13
Jul-13
Nov-13
Mar-14
Jul-14
Nov-14
Mar-15
Jul-15
Nov-15
Mar-16
Jul-16
Nov-16
Mar-17
Jul-17
Nov-17
8%
7%
6%
5%
4%
3%
2%
1%
0%
-1%
-2%
US
Euro
China
Japan (time shifted*)
Source: Schroders, Haver. Data to 31 December 2015.
* Time shifted: Japan data from 1990s shifted to match global fiscal crisis (1990 = 2008).
There is a great deal of fear of deflation at present. GDP deflators are certainly showing low numbers. But there are some
differences with Japan in the 1990s. At this stage, after its own crisis, Japan had moved to outright deflation. The US and
eurozone appear to have stabilised at low but positive numbers. China may show a more worrying trend, with a rapidly
dropping deflator and no signs of stability.
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Were there any signs of an investment bubble before the global financial crisis? As in the charts above Japan has been
time-shifted and 2008 = 1990.
Figure 4: Investment/GDP
50.0%
45.0%
40.0%
35.0%
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
US
Euro
China
Japan (time shifted*)
Source: Schroders, Haver. Data to 31 December 2015. *Time shifted: Japan data from 1990s shifted to match global fiscal
crisis (1990 = 2008).
Japan saw an increase in the investment share of GDP in the mid 1980s. There was nothing noticeable in Europe before
2008 and a small pick-up in the US in 2003 – 2004. But both Europe and the US were investing much less than Japan.
The stand out is China which is investing over 40% of its GDP. This is higher even than Japan reached in the 1960s. Is it
matched by a debt build up?
Figure 5: Corporate debt/GDP
190%
170%
150%
130%
110%
90%
70%
Mar 00
Aug 00
Jan 01
Jun 01
Nov 01
Apr 02
Sep 02
Feb 03
Jul 03
Dec 03
May 04
Oct 04
Mar 05
Aug 05
Jan 06
Jun 06
Nov 06
Apr 07
Sep 07
Feb 08
Jul 08
Dec 08
May 09
Oct 09
Mar 10
Aug 10
Jan 11
Jun 11
Nov 11
Apr 12
Sep 12
Feb 13
Jul 13
Dec 13
May 14
Oct 14
Mar 15
Aug 15
50%
US
Europe
China (TSF)
Japan (time shifted*)
Source: Schroders, Haver. Data to 31 December 2015. *Time shifted: Japan data from 1990s shifted to match global fiscal
crisis (1990 = 2008).
Figure 5 above shows there was a rise in corporate debt in the US and Europe before the crisis, although not as big as the
rise in Japan. We do not have historical series for the breakdown of Chinese debt, so the numbers in the chart are for Total
Social Financing, which includes all forms of debt. However, we do know from the few data points we have that the
majority of the debt is issued by State Owned Enterprises (SoEs) and local government financing vehicles (the difference
between the two is sometimes unclear). It is certainly fair to say that massive Chinese investment has been funded by
debt.
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Rates
Figure 6: Real rates
8%
6%
4%
2%
0%
-2%
-4%
US
Euro
Jan-16
Sep-15
Jan-15
May-15
Sep-14
Jan-14
May-14
Sep-13
May-13
Jan-13
Sep-12
May-12
Jan-12
Sep-11
Jan-11
China
May-11
Sep-10
Jan-10
May-10
Sep-09
May-09
Jan-09
Sep-08
May-08
Jan-08
Sep-07
Jan-07
May-07
Sep-06
Jan-06
May-06
Sep-05
May-05
Jan-05
-6%
Japan (time shifted*)
Source: Schroders, Haver, Bloomberg. Data to March 2016. *Time shifted: Japan data from 1990s shifted to match global
fiscal crisis (1990 = 2008).
Real rates in the US and Europe dropped to negative levels in 2008 and have stayed there since (apart from a brief period
where base effects on inflation sent them positive). However China may be making the same mistake as Japan and has
kept real rates high despite its slowing economy and debt build up. So the US and eurozone have shown a better policy
response to the global financial crisis than the Bank of Japan showed to their crisis. However the fact that real rates are
still negative almost 8 years after the 2008 crash suggests that growth expectations are still weak and investment demand
is low. It is interesting to note that real interest rates in the US and Europe have gone negative despite inflation remaining
positive, suggesting even more pessimism than was seen in Japan.
Fiscal
Figure 7: Fiscal deficits
4%
2%
0%
-2%
-4%
-6%
-8%
-10%
-12%
-14%
2000
2001
2002
2003
2004
US
2005
Euro
2006
2007
China
2008
2009
2010
2011
2012
2013
2014
2015
Japan (time shifted*)
Source: Schroders, Haver. Data to 31 December 2015.
*Time shifted: Japan data from 1990s shifted to match global fiscal crisis (1990 = 2008).
The US and eurozone moved much more quickly to large deficits than Japan. The question, particularly in the eurozone,
was whether the stimulus was removed too soon. Austerity in Europe has led to more pressure on the European Central
Bank (ECB) to loosen policy, which, due to the zero lower-bound, is difficult to do. China has yet to respond fiscally. That
gives it scope to act when it feels it is reaching a crisis. Of course some would argue it is already in one.
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Banking
Figure 8: Return-on-equity (RoE) for banks
30%
20%
10%
0%
-10%
-20%
-30%
US MSCI Banks
Euro Area MSCI Banks
China MSCI Banks
Dec-15
Aug-15
Apr-15
Dec-14
Aug-14
Apr-14
Dec-13
Aug-13
Apr-13
Dec-12
Aug-12
Apr-12
Dec-11
Aug-11
Apr-11
Dec-10
Aug-10
Apr-10
Dec-09
Aug-09
Apr-09
Dec-08
Aug-08
Apr-08
Dec-07
Aug-07
Apr-07
Dec-06
Aug-06
Apr-06
Dec-05
-40%
Japan (average of 25 banks)
Source: Schroders, Haver. Data to March 2016.
After the shock of 2008, we can see that banks in the US returned to profitability. Europe took longer, with RoEs still very
low in 2012. China has probably unsustainably high ROEs. The policy response has been different in each case. The US
launched a forced injection of equity into the banks in 2009, which seems to have been effective; Europe fell into a major
crisis of sovereign debt in 2010-2013 which impacted its banking system. It took a long while for the ECB to gather a
consensus to provide extensive liquidity to the banks and force private sector recapitalisation. Even now, doubts remain.
Progress has undoubtedly been made in peripheral countries such as Ireland and Spain, but less so in Germany, for
example. Italy is currently attempting to clean up banks’ loan books but is struggling to get agreement from others in
Europe to be able to fund the inevitable recapitalisation fiscally. China is still not recognising bank non-performing loans
and hence the need for recapitalisation. We can also see that the Japanese response was uniquely bad.
Structural Reform
Here we have very different responses
The US needs less structural reform than other countries as it already has a very flexible labour market and functioning
bankruptcy rules etc.
The eurozone response has been patchy. For example, some of the countries severely affected by the eurozone crisis
have made significant reforms. In the case of Spain, it may well have done enough. In Greece much has been done, but
the rest of Europe still wants more. In Germany there has been little recognition of any need to make changes, following
the labour market reforms of the 2000s. However reforms to the banking sector are almost certainly needed.
China is in a different phase of development from other economies. Its main problem is over capacity in a few key
industries. Some recognition has been made of this but plans to address the problems are gradual.
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Demographics
This chart uses the UN population database to project numbers out to 2030.
Figure 9: Working age/total population (%)
80%
75%
70%
65%
60%
55%
US
Euro Area
China
2030
2028
2026
2024
2022
2020
2018
2016
2014
2012
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
50%
Japan
Source: Schroders, Haver. Forecasts to Dec 2030 from UN Population database.
Demographics look poor everywhere.
Summary
In a whistle stop tour like this, it is impossible to give full flavour to the complexities of a crisis and the response to it. Even
assuming the comparison with Japan is valid we are making some assumptions about when exactly on the Japanese
timeline the US, Europe and China are. It looks as though China is still in the pre-bubble and collapse phase in terms of
investment levels and ongoing debt build up, for example. So the conclusions are necessarily broad. But here is an
attempt to summarise them.
Japanese Features
Low Growth
Deflation
YES
US
China
NO
NO (but decelerating)
NO
NO
NO (but below 1% and dropping)
Investment bubble
YES/NO (periphery only)
YES
YES
Corporate Debt Build Up
YES/NO (periphery only)
NO (but household debt)
YES (SoEs + local gov’t)
YES/NO
NO
YES
YES/NO
NO
YES
Ongoing banking problems
Monetary policy response
too slow
Negative Real Interest Rates
YES
YES
NO (but low and falling)
Fiscal policy too tight
YES
YES/NO
YES
Demographics deteriorating
YES
YES
YES
YES/NO
NO
YES
Structural reform too slow
YES= Similar to Japan
Source: Schroders. April 2016.
6
Eurozone
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Now we need to tie all this back to deflation. So far, the US is not in deflationary territory and neither, by and large, is
Europe although some parts are worrying. Looking at the comparison list it is China and Europe that seem most likely to
suffer Japan sickness. The US appears to have enough differences to suggest that deflation is not going to become the
default state. In Europe, the combination of tight fiscal policy and a central bank that may be reaching the limit of its ability
to loosen is putting pressure on the European economy. The fact that Europe has negative real rates without deflation
highlights the risks. Also, part of Japan’s problem was shocks to the system becoming entrenched in behaviour. All of the
three big economies are potentially big enough to provide that shock to the other two. So there are risks.
More generally, it seems that deflation is not inevitable. But it is more likely if you don’t allow capital to recirculate. When
policy does not allow for bad debts to be recognised and banks restructured, more pressure is put on monetary and fiscal
policy in the longer term. Add in demographic pressures and banking problems become a trap you don’t escape from. But
In the end this is all a political decision. The reluctance to accept the winners and losers that stem from a restructuring
ultimately backfires. But the gradual nature of the decline may make that a politically easier option. That is the choice
confronting China over the next few years.
What needs to happen
If deflation is a threat, not yet a promise, what needs to happen to avoid it?
US: probably not much. Labour market is flexible, banks are functional. Should threat grow, government can consider
using fiscal side through debt forgiveness (e.g. student loans).
Eurozone: Germany has a solid fiscal position and is underinvested in public infrastructure. Fiscal constraints are
hampering Italian efforts to clean up and recapitalise their banks. If fiscal policy is crimping demand and stopping structural
reform then it is too tight. The question for Europe is whether the politics and institutional framework of the eurozone, can
allow for a reversal and accept an expansionary fiscal policy
China: In some ways, China looks like Japan in the 1970s – coming off its investment boom, but a long way from a bubble
and crisis. In other ways it looks as though it is succumbing to Japanese disease in terms of its declining growth and
inflation. China has overcapacity in some industries which is driving deflationary pressure. It needs to address this
overcapacity. Given the deflationary pressure it probably also needs looser monetary policy. That is difficult to do without
also leading to a weaker currency, which is politically difficult.
The overarching conclusion is that there are certainly things that can be done to alleviate deflationary pressure. But many
of them would be considered quite radical and necessitate some considerable political movement in both China and
Germany.
Appendix
“Japanese disease”
Japan enjoyed massive investment after WW2 as the economy re-industrialised.
Figure 10: Japan investment trends
50%
40%
30%
20%
10%
0%
Mar-55
Nov-56
Jul-58
Mar-60
Nov-61
Jul-63
Mar-65
Nov-66
Jul-68
Mar-70
Nov-71
Jul-73
Mar-75
Nov-76
Jul-78
Mar-80
Nov-81
Jul-83
Mar-85
Nov-86
Jul-88
Mar-90
Nov-91
Jul-93
Mar-95
Nov-96
Jul-98
Mar-00
Nov-01
Jul-03
Mar-05
Nov-06
Jul-08
Mar-10
Nov-11
Jul-13
Mar-15
-10%
Investment/GDP
Investment 3 yr average growth
Source: Schroders. Haver. Data to December 2015.
The investment boom peaked in the 1960s with investment nearly 40% of GDP and growth in investment over 20%.
During the 1980s investment was still over 30% of GDP. For comparison the GDP share of investment in the US has rarely
got above 20% since 1950, with 3 year annualised growth rates peaking at 15%.
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Japan was obviously devastated after WW2 and in need of major investment. But there comes a point when your economy
has all the roads, airports, ports, schools, hospitals and so on that it needs. At this point, depending on monetary and fiscal
policy settings, there is a risk of a financial bubble – essentially, business and government extrapolate historic investment
trends beyond their need. Of course, this is exactly what happened in Japan.
To show the extent of the bubble, here is a chart of the price-earnings (P/E) ratio of the Topix share index, with the S&P
500 shown for comparison.
Figure 11: Japan and US PE ratios
Jan 77
Feb 78
Mar 79
Apr 80
May 81
Jun 82
Jul 83
Aug 84
Sep 85
Oct 86
Nov 87
Dec 88
Jan 90
Feb 91
Mar 92
Apr 93
May 94
Jun 95
Jul 96
Aug 97
Sep 98
Oct 99
Nov 00
Dec 01
Jan 03
Feb 04
Mar 05
Apr 06
May 07
Jun 08
Jul 09
Aug 10
Sep 11
Oct 12
Nov 13
Dec 14
Jan 16
100.0x
90.0x
80.0x
70.0x
60.0x
50.0x
40.0x
30.0x
20.0x
10.0x
0.0x
Topix
S&P 500
Source: Schroders. Morgan Stanley. Bloomberg. Data to March 2016.
The Topix had spent two years or so with historic P/E ratios of near or over 60 in the run up to the bubble (they were even
higher after the collapse as share prices dropped more slowly than earnings). In contrast, during the Nasdaq bubble of
2000 the S&P 500 only managed a multiple of 40.
Other asset prices were extended too. There is no reliable price series for aggregate Tokyo land prices. However, the most
expensive district in Tokyo – Ginza – peaked at about $220,000 per square meter using exchange rates at the time. In
contrast Manhattan apartments were selling for about $2,000 – 2,500 per square meter. The average land prices for the
six biggest cities in Japan quadrupled in the ten years up to 1990.
So far, we see a Japan which invested heavily and successfully up until some point in the 1980s and then continued to
invest heavily when it was no longer a good idea. A bubble and collapse ensued. But the real question for Japan is not why
there was a bubble and collapse; it is why are the effects of that collapse seemingly still being felt 25 years later?
Commensurate with a bubble led by an investment boom, there is almost always a debt boom. The essence of the bubble
is that companies over extrapolate rates of growth into the future and over invest to meet the supposed higher levels of
demand and this investment will inevitably be mostly financed by debt. We can certainly see that in Japan in the 1980s.
Figure 12: Non-financial corporate debt % GDP
130%
120%
110%
100%
90%
80%
70%
Corporate debt picked up sharply in the years leading up to the peak of the bubble.
8
Mar 96
Sep 96
Mar 95
Sep 95
Sep 94
Mar 94
Mar 93
Sep 93
Mar 92
Sep 92
Mar 91
Source: Schroders. Haver. Data to December 1996.
Sep 91
Sep 90
Mar 90
Mar 89
Sep 89
Mar 88
Sep 88
Mar 87
Sep 87
Sep 86
Mar 86
Mar 85
Sep 85
Mar 84
Sep 84
Mar 83
Sep 83
Sep 82
Mar 82
Mar 81
Sep 81
Mar 80
Sep 80
60%
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The collapse of the bubble reduces the asset values that backed the debt and hence a lot of it goes bad. This, in turn,
hobbles the banking system which becomes capital constrained and unable to lend, and also massively increases the
demand for public sector (i.e. safe) debt. These “balance sheet recessions” often take a long time to work out. But surely
not 25 years. So what turned the stockmarket collapse into a permanent state of affairs?
A number of reasons have been put forward for the longevity of Japan’s malaise.
Poor monetary policy
Can poor monetary policy cause an extended slump? The argument is that if policy is wrong for an extended period of time
you fundamentally change perceptions in the economy and move it to a new low growth equilibrium – essentially people
stop spending and investing because they believe that economic growth will remain low, thus creating a self-fulfilling
prophecy. The chart below looks at interest rates, inflation and real rates (the difference between the two) up to and just
after the bubble.
Figure 13: Japanese rates and inflation during the crisis
7%
*Equity Bubble bursts
6%
5%
4%
3%
2%
1%
0%
-1%
Inflation
Rates
Sep-96
May-96
Jan-96
Sep-95
May-95
Jan-95
Sep-94
May-94
Jan-94
Sep-93
Jan-93
May-93
Sep-92
May-92
Jan-92
Sep-91
May-91
Jan-91
Sep-90
May-90
Jan-90
Sep-89
Jan-89
May-89
Sep-88
May-88
Jan-88
Sep-87
May-87
Jan-87
-2%
Real Rate
Source: Schroders, Haver, Bloomberg. Data to December 1996.
The Bank of Japan did not start cutting interest rates until more than a year after the bubble peaked at the end of 1989,
during which time the stockmarket had fallen more than 40%. Real rates did not reach zero until 1996. Once rates reached
zero they stayed there, as the chart at the start of this piece shows. Low real rates failed to generate any significant pick up
in demand, because – as stated before – there was a large investment overhang and high corporate leverage reinforced
by deteriorating demographics.
Poor fiscal policy
For a fiscal boost to have a chance to work, it needs to involve more spending than there was before and for that spending
to be financed by debt. That means spending and deficits rising. The chart below shows Japan did both these things, but
in 1992/1993 – two years too late.
Figure 14: Japan fiscal dynamics around the crisis
20%
15%
10%
5%
0%
-5%
-10%
1987
1988
1989
1990
1991
Deficit
Source: Schroders. Haver. Data to December 1996.
9
1992
1993
Government/GDP
1994
1995
1996
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Banking
When a financial bubble, fuelled by debt, collapses it usually leaves behind a mess in the banking system. A large amount
of bad loans puts pressure on banks’ capital and leads to an unwillingness to lend. That can hobble an economy for years
if not dealt with. And dealing with such problems is not easy – it usually involves capital injections to the banks from the
government/central bank which can be politically difficult. Indeed, the incentives for Japanese banks were often pointing in
the opposite direction. It was politically convenient for a bank not to ask for capital and the easiest way to do that was to
deny the existence of non-performing loans by rolling them over instead. This so-called “extend and pretend” strategy led
to the existence of “zombie companies” – companies which could only be kept alive with bank forbearance.
Japan did not adopt a framework for bank bailouts until 1997 – 1998 and did not launch a major bank recapitalisation until
2003. Perhaps the easiest way to see this is a chart of the return on equity of Japanese banks.
Figure 15: RoE for Japanese banks
15%
10%
5%
0%
-5%
-10%
-15%
-20%
-25%
-30%
-35%
Jun-00
Nov-00
Jan-00
Mar-99
Aug-99
Oct-98
May-98
Jul-97
Dec-97
Feb-97
Apr-96
Sep-96
Jun-95
Nov-95
Jan-95
Aug-94
Oct-93
Mar-94
May-93
Jul-92
Dec-92
Feb-92
Sep-91
Apr-91
Nov-90
Jun-90
Jan-90
Aug-89
Oct-88
Mar-89
Dec-87
May-88
-40%
Source: Schroders. Morgan Stanley. Data to March 2001.
This chart is a simple average of 25 major Japanese banks (not all of whom survived). RoEs dropped below 5% in 1991
and stayed substantially negative for much of the time. This is a period when Japanese banks would not be lending.
Structural reform
Japan did little after the crisis to boost productivity and potential growth. Japan has been dominated politically by one
political party – the Liberal Democratic Party (LDP) – which has built strong links with large business and the agricultural
sector. Japan is famous for government intervention in all sorts of business via regulations, subsidies and permitting.
External commentators identified the need for Japan to adopt labour market reform, deregulation and reform of corporate
management and a host of other reforms too. Former Prime Minister Junichiro Koizumi tried some reforms in the early
2000s, but until incumbent Shinzo Abe’s “third arrow” approach, the need for major reform was not really recognised. Even
now, three years after Abenomics began, not a lot has happened.
Demographics
Was the propensity to invest and consume fundamentally changing in Japan anyway due to demographics? The early
1990s was the point when both working age population and workers as a percentage of total population began to drop.
Figure 16: Japan demographics
72%
000’s
90,000
70%
80,000
68%
70,000
66%
64%
60,000
62%
50,000
60%
40,000
58%
Workers/total population (LHS)
Source: Schroders, Haver. Data to December 2015.
10
Working age population
2013
2010
2007
2004
2001
1998
1995
1992
1989
1986
1983
1980
1977
1974
1971
1968
1965
1962
1959
20,000
1956
54%
1953
30,000
1950
56%
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People are generally in their peak spending years in their 30s to 50s as they look to establish households and provide for
children. As a population ages there will be fewer of these ‘big spenders’ and so GDP begins to drop. Demography is more
predictable than many trends, so when ageing becomes visible, expectations move accordingly reinforcing spending and
investment trends.
Why has nothing worked?
We have a lot of possible culprits for Japanese low growth since 1990, none of them entirely convincing as sole
explanations. The full answer is probably a combination of all of the effects. A late response to the bad debt problems in
the banking system may not have been insurmountable, zombie companies and all, except that overall demand in the
economy was suffering too due to poor monetary and fiscal policy. As time went by the demographics entrenched
spending and investment behaviours, political conservatism meant there was no reform to break the cycle and so when
policies in other areas finally were pointing in the right direction, they were less effective. If the answer to the question of
the Japanese malaise is “a bit of everything”, then assessing the rest of the world is going to require a look at all of these
factors.
Important Information:
The views and opinions contained herein are those of Allan Conway Head of Emerging Markets Equities, and may not
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