How a country’s working age population growth impacts economic growth and stock returns. What Japan can do about its population decline.
In this episode you’ll learn:
- Why traveling can turn us upside down.
- Why an increase in the working age population leads to faster economic growth and higher stock returns.
- How countries can mitigate the negative economic impact of shrinking population.
- Why a Japanese debt default wouldn’t destroy the nation’s wealth but redistribute it.
Welcome to Money For the Rest of Us. This is a personal finance podcast, it’s on money – how it works, how to invest it and how to live without worrying about it. I’m your host, David Stein. Today’s episode is episode #178, titled “Japan and the Impact of a Shrinking Population.”
Returned from Japan
I recently returned from 12 days or so in Japan. When I travel there, at times it’s completely overwhelming; so many people… There’s a quote by Pico Iyer – he’s an essayist and author; he lives in Nara, Japan, and he pretty much sums up how I felt as I traveled there. This is from a piece titled “Why we travel.” He writes:
“But for the rest of us, the sovereign freedom of traveling comes from the fact that it whirls you around and turns you upside down, and stands everything you took for granted on its head.”
That’s how I felt – just completely turned upside down. At one point, my son and I were traveling during rush hour; we were on the train, going from Utsunomiya to Imaichi, this is in north of Tokyo. The train is crowded, nobody says anything; very quiet. Everybody kind of looks down. Nobody stares in Japan.
We got off at our stop, and it’s just this swarm of people carrying us along, and I thought of a word that Seth Godin brought to my mind in a post a few weeks ago… It was the word “sonder.” It’s a made-up word, it was made up by John Koenig. He does a project that’s called The Dictionary of Obscure Sorrows. This is a dictionary of new words to describe emotions that we currently don’t have a word for. The word is “sonder” and the definition is:
“The realization that each random passerby is living a life as vivid and complex as your own, populated with their own ambitions, friends, routines, worries, and inherited craziness. An epic story that continues invisibly around you, like an ant hill, sprawling deep underground, with elaborate passageways to thousands of other lives that you’ll never know existed, and in which you might appear only once, as an extra, sipping coffee in the background, as a blur of traffic passing on the highway, as a lighted window at dusk.”
That’s probably the first dictionary I’ve read that’s so poetic…
But Japan is visually stimulating. The entire week in Tokyo – which has a population of nine million people; the Greater Tokyo Area has around 32 million people – I heard only one car horn honk. People don’t lock their bikes. The kids ride and walk to school by themselves; small children. I saw one child, he must have been eight – we were in Harajuku… He was on his bike, at a busy, busy intersection; he just rides through, all the people coming at him crossing at the crosswalk.
I saw the rice harvest for the first time.
I did see homeless people, but very few, and those that I saw were just under the underpasses in homes they’d made out of boxes, very elaborate homes. No one asked for money the entire week. We stayed at a traditional ryokan, a traditional hotel, with an onsen in the bath… Just to be there, to observe. These are just anecdotes. When you go somewhere, you really just get anecdotes. That can turn you completely around.
The cars in Japan – we rented a Toyota Corolla, and it felt like one of the biggest cars on the road, because the lanes are very narrow, and most cars were smaller than that. And you drive on the left side of the road, which I’ve done before, but it can be very confusing.
The hardest part this time though is because you’re driving on the left side of the road, your steering wheel is on the right side of your car, and your turn signal – you use it with your right hand instead of your left. On your left you have the wiper blades. So, for the first few days I was constantly turning on the wiper blades in order to signal my turn. But then after a week or so I got used to it, and when I come back to Idaho I’m always turning on my wiper blades with my right hand to signal my turn.
But it raises the question, “Why do we drive on the right side of the road and other countries drive on the left?” About 35% of the world’s population drives on the left side of the road. Most of them are British or British colonies; the exception is Japan… And that was the normal thing to do back in feudal times, because most people were right-handed. This is from a website called World Standards (I’ll link to it).
Most people were right-handed, and the swords had been preferred to keep on the left, so that they could have their right hand to pull out their sword to face their opponent that was coming at them. Their sheath or their scabbard was on the left, and they didn’t want that running into people.
Also, most of them got on their horses on the left side, and if you were always getting on on the right side, you’d be doing it in the middle of traffic. Very, very old — but then in the 1700’s according to this site, teamsters in France and in the U.S. began hauling farm products in big wagons with several pairs of horses. There wasn’t a driver’s seat, so the driver would sit on the left rear horse, so he could keep his right arm free to latch the team. He was on the left side, so it made it easier to… Because he was sitting on the left, he wanted everyone to pass him on the left, because he had a better view, because he had all these horses on his other side.
At that point, the wagoneers were on the right side of the road, and they let the traffic pass on the left. That’s how it evolved when cars came along, except not in Britain and not in Japan.
Another thing I noticed is it’s cold in Japan a lot. They don’t often heat… We were using Airbnb mostly. Often the front rooms — well, the heaters are space heaters typically, and often the kitchen/dining area isn’t heated. I have no idea why. The toilet room is never heated. That’s why the Japanese have perfected the art of the heated toilet seat.
And you sit at the table – because you sit at the ground, typically, at a very low table, but there’s usually often a heating blanket right there around the table to keep you warm, because there’s no heat. But as a result, Japan uses about half the energy of the U.S. on a per capita basis.
An Aging Population
Probably the biggest thing I noticed, especially as you go out into the countryside, is many of the workers are really old. The security guards – most of them are in their seventies. The garbage men – many of them were in their seventies, maybe older… Because the Japanese, generally speaking, always seem to look very young, even as they age, so I don’t know how old, but clearly, there was a lot of older people continuing to work.
Now, Tokyo seems very young, a lot of young people. But you go out into the countryside and it’s mostly older people. A reason for this is Japan’s population is shrinking. They peaked in 2008 at 128 million. Now the population is 127 million, and the National Institute of Population and Social Security Research estimates that by 2065 the population in Japan will be only 88 million… A 30% decline in the population. And the young people are attracted, like in many countries, to the city, Tokyo and the Greater Tokyo Area. I misspoke, it’s 38 million people. Tokyo City is 9.3 million. And there’s plenty of jobs in Tokyo. There are two job openings for every candidate in Tokyo.
Now, unemployment rate across the country is 2.8%, so with a shrinking population, there’s plenty of jobs, and if you’re older, you can continue to work, and you’re often encouraged to work, because who’s going to collect the garbage if there’s no young people in the village or town to do it?
We visited a Buddhist monk, where my son cut wood — and pottery… He cut wood for him, split wood for two weeks about three years ago. We went back… Small town. This monk is a nice, nice guy. He says “I have no money. All I have is wood.” And he had piles of it everywhere. He burns his kiln once a year. But in that town, they shut the school down because there weren’t any more kids in this small little village, and they didn’t need a school there.
The world population is expected to increase by 28% from 2016 to 2050, but there are countries where their population is expected to shrink. Japan is the leader in that, followed by Poland, Hungary, Germany, Taiwan. All are expected to have population declines of greater than 10%. Russia, Portugal, Hong Kong, Greece, South Korea and China will see their populations likely slump by over 5%.
Now, I’m sharing with you a lot of population data at will. This is a study that Ned Davis Research put together. They have a lot of population data and demographics. I’ll link to Ned Davis’ site on moneyfortherestofus.com, but even if you’re not a client, they’re actually giving opportunity for people to download this study that they did.
One of the things that has happened is life expectancies are increasing. Ned Davis points out, in 1970 just 5% of the world’s population or children under the age of 5 had vaccinations. In 1990 it was 75%. As a result, life expectancy increased from 47 years in the 1950’s to 71 years today. That’s huge in terms of life expectancy.
At the same time, you have fertility rates slowing in many areas of the world. Japan has the highest life expectancy of anywhere in the world, 87 years. The people are living a long time, yet they’re not having as many kids, and as a result, the median age is extending out. In Japan the current median age is 47 years. It’s expected to increase to 56 years by 2050.
Overall in the world, the current median age is 30. That’s up from 26 years just 15 years ago. By 2050 the median age will be 37. That’s 37 for the total world, 56 for Japan.
One of the contributions or primary determinants of economic growth is how many workers are there, and is the working-age population increasing? Economist David Bloom and David Canning found that when you increase the growth rate in the working-age population as a share of the total population by one percentage point, that results in an increase in the rate in per capita GDP of 1.4%. And why is that? Well, economic growth is a function of workers; long-term economic growth – the number of workers and how productive they are.
As the working-age population grows, that actually means more economic growth, because you do have more workers, but you also get higher productivity, because those workers have skills that they develop. And as we’ve talked about last week, as long as we’re investing in their skills, to improve them and keeping them up to date… When you start a new job, you gradually just get better naturally, over time, hopefully. So as you have the youth move into the working age, you get this productivity increase as you get this groundswell of workers getting more productive.
And as there are less youth dependents, that frees up capital that can be put to use in capital expenditures and productivity-enhancing projects. As a result, as the working-age population increases, you see higher economic growth, and you see better performance for the stock market, because the faster the economic growth, the greater the corporate profits and long-term stock returns are higher in countries that are experiencing economic growth and experiencing an increase in the working-age population as a percent of the total population.
If you download that Ned Davis demographic study, they have a number of charts in there. They call it the MY (Mature-to-Young) Ratio, and they’re looking at the ratio between those ages 35 to 49, compared to those in a particular country from 20 to 34. As that ratio increases, as you get more in the 35 to 49 compared to those in the 20 to 34, there’s a really high correlation in terms of performance of the stock market. Stocks do better, as we said, as that working population increases.
There’s a number of charts there, but a number of interesting things is in the U.S. that ratio bottomed in 2016, and it’s set to continue to rise through the year 2040. Emerging markets has a very favorable MY ratio with that tailwind really going until 2050, because they have a younger workforce that will then age, become more productive. That contributes to it. Then that working-age population tends to save more, which also boosts the return for stocks.
Today around the world 66% of the world’s population is working-age, and by 2050 it’s expected to fall to 63%. But in Japan, they’re going to have the smallest share of the world’s working-age population by 2050, only 49%. And 40% of their population will be seniors, the elderly.
Japan’s working-age population as a percent of its total population peaked in 1992. So their population is shrinking, but it’s also getting older. The dependency ratio of the seniors to the working population is getting more severe. Right now there are roughly two people of working-age per senior, but it’s expected to grow to two retires for every three working workers by the year 2050. So you’re going to have fewer people supporting each retiree, and that also has an impact on the budget.
Right now, Japan spends about 16.6% of GDP on benefits to the elderly. It’s expected to grow to 20.9% by 2040. Compare that to the U.S. – the U.S. spends about 13.6% of GDP on benefits for the elderly. It’s expected to grow to 18.5%.
But there’s some countries that are even worse. Italy and France both spend about 20% of GDP currently on the elderly, and it’s expected to grow to 24%-26% by the year 2040.
That’s a challenge. But the challenge is not so much these accounting issues, what percent of GDP is being spent on the elderly, who’s spending the money, how much is the government spending; the fundamental issue is will there be enough workers to produce the goods and services that the aging population needs?
If there’s not enough workers and they’re not able to somehow produce, then you’re going to get inflation, because you get constrained capacity. Now, Japan is not suffering any type of inflation at present. Really, they’ve been fighting against deflation.
A friend that we met up with in Tokyo – they’re looking to buy their first home, and he wrote me the other day, he wanted to know should they go with a variable rate loan or a fixed rate loan. Check out these interest rates – the variable rate loan interest rate was 0.65%. The fixed rate was 0.97%. Imagine having a mortgage rate with under 1%. That’s what you get in Japan, plus they get a subsidy of up to 1% of the purchase price of their home from the government to buy this home. That’s for a 35-year mortgage, a very long mortgage.
So what can Japan and other countries do to make sure there’s enough workers, that they’re able to produce the goods and services they need to support an aging and a shrinking population? Well, the first thing they could do is they could increase the female labor force participation rate.
In the U.S. about 57% of women are working. In Japan only 48%. Often times when a woman has a child, they stop working. And there’s some things within the Japanese culture that just discourage the women continuing to work as they get older. That’s probably something that’s going to need to change.
I saw they were in the midst of the election for the lower house of parliament, and as you drive around Japan in the rural areas there’s these wooden signboards and candidates for parliament put up their picture and their name. Mostly men.
New York Times reports only 9% of seats in the lower house of parliament are held by women. That ranks 165 out of 193 countries. That’s not real diverse in terms of the parliament. And fewer than one in five candidates running in Sunday’s election – this past Sunday – were women. That you also see in the workforce. So you need a higher female participation rate in the workforce to sort of have the workforce to produce the goods and services of an aging population.
Another option is immigration. Japan has not been particularly open to immigration. As you go around Tokyo and around the country – mostly Japanese. When I was in Norway, you go around and you see a large number of immigrants.
Japan is expected to lose six million people ages 15-54 as the country ages over the next decade. To replace that, you would need upwards of 600.000 immigrants per year. The government has tried to put into place some programs – they call them internships – to attract mainly cheap labor to work on the farms and in some of the factories, a lot I guess from China. But it needs to be — I mean, if they’re going to use immigration, it’s going to be hundreds and hundreds of thousands of new immigrants per year.
The other option is automation, robots. Here’s a country where automation is not going to take jobs away from workers, in the sense that the workers won’t have jobs and the unemployment will rise. Because of a shrinking population, they really can benefit from automation and robotics. So more women in the workforce, more immigrants and more automation will help Japan to offset a shrinking population and produce enough goods and services to meet the needs of seniors.
Now, whenever we talk about shrinking population – I’ve talked about this in earlier episodes – what about the debt? Japan has the highest indebtedness of any country in the world in terms of government debt. Will they default? Well, an interesting piece by Noah Smith of Bloomberg from last month. He writes:
“Since the vast bulk of Japan’s government debt is owned by Japanese people, the question isn’t about paying back external creditors. It’s a matter of distribution of economic resources among the Japanese people.
If the government defaulted on its debt tomorrow, it would certainly hurt the financial system and cause a recession. But the most lasting effect would be to let Japanese taxpayers off the hook, while Japanese bondholders would find themselves less wealthy. The country wouldn’t have a fundamentally weaker economy — all the factories, land, people and know-how would still be there. But the promises about who gets to receive the fruits of that economy would be shifted.”
That’s a point I’ve made in numerous episodes. The wealth of a nation is its ability to produce, is its workers, is its land, is its factory, its people, and if Japan decides to default on its debt – because it would be a decision – then it’s just a redistribution in terms of potentially hurting the elderly, who hold most of those bonds as their retirement savings. It would be disruptive but it’s all accounting, and they will work it out.
Japan’s population is aging, but they’re going to adapt; they all adapt. We’re seeing it now. When you see a 75-year-old garbage man, they’re adapting. When you see the automation, just the sheer number of vending machines everywhere… It doesn’t take as many workers if you’re buying food from a vending machine, as opposed to a restaurant. More automation. So Japan will adapt.
But when you look at the potential impact on the Japanese stock market long-term, they’re not a country where the working-age population is going to be growing. It’s going to peak in 2020 in terms of that MY Ratio I talked about earlier. But then, there’s going to be a demographic headwind, which is why as investors, it’s often good to overweight areas that have a demographic dividend, where you see the working-age population increasing. By and large, those are younger, less developed countries; emerging markets have that demographic tailwind.
That’s episode #178 on “Japan and the shrinking population.” You can get show notes at moneyfortherestofus.com. While you’re there, go ahead and sign up for my Insider’s Guide; I’ll send you the show notes weekly for free, along with an essay I do, some of the best writing I do each week. You can sign up for that at moneyfortherestofus.com. If you’re a U.S.-based listener, just text the word “insider” to the number 44222.
Everything I’ve shared with you in this episode has been for general education. I’ve not considered your specific risk situation… So no investment advice here, just general education on money, investing and the economy. Have a great week!