How a zero-growth economy would impact investing, employment and lifestyle. It depends on whether the economy is flat lining due to population shrinkage or a willful choice to be less productive.
In this episode you’ll learn:
- How economic growth is measured.
- Why long-term economic growth is tied to population growth and/or productivity growth.
- How population decline can lead to deflation, stagnating stock markets and falling bond yields.
- What happens if Japan defaults on its government debt.
- What would happen if a nation willfully became less productive by producing goods and services that were higher quality, more intricate and took more time to create.
Show Notes
Small Is Beautiful by E.F. Schumacher
A Sprawl of Ghost Homes in Aging Tokyo Suburbs – New York Times
Japan’s Debt Trap – Noah Smith – Bloomberg
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Summary Article
The Case of the Shrinking Country
One of my favorite places to visit is Japan. I like its quiet sense of order.
In Tokyo, the largest city in the world, it’s rare to hear a car horn honk. The taxi drivers wear white gloves and hang lace doilies over the seats of their cabs.
As you walk the city streets, you have to look hard to find a piece of litter, despite the absence of public trashcans.
The trains are spotless, and even during the busiest commute times when I’ve stood and swayed back and forth in a crowded car, I never heard a word.
The reverence and order I felt as I visited Japan on my first trip surprised me. I was expecting a country that showed outward signs of distress. After all, the economy hadn’t grown in twenty years. Nor had the stock market.
The Lost Decade?
On that first trip, I had dinner with a friend who is a German ex-patriot and married to a Japanese woman. He has lived in Yokohama for several decades.
I mentioned to him how surprised I was how prosperous Japan seemed even though the country had been living through several lost decades in terms of its economic and stock market performance.
He replied, “If Japan is suppose to be suffering, someone forgot to tell us.”
Japan’s lack of economic growth is not because its workers aren’t productive and have nothing to do.
The nation’s unemployment rate is less than 4%, although many of those jobs are classified as temporary and don’t have the lifetime employment perks that have traditionally been associated with Japanese “salarymen”.
Population Decline
Rather, Japan’s economy has stagnated because its population is declining.
Last year, Japan had approximately one million newborns and 1.3 million deaths, resulting in a population decrease of about 300,000.
A declining population means there is less overall demand for goods and some services.
As a population ages and declines, demand for services such as health care increases while demand for certain goods, such as housing, falls precipitately.
The Japanese government estimates there are eight million unoccupied dwellings in Japan, half of which are just sitting there; neither for sale or for rent.
Deflation and Investing
Japan’s geography isn’t shrinking, just its population, which means Japan has excess land and housing. When demand falls and supply stays the same then prices for goods fall.
Japan has experienced deflation or falling prices over the past twenty years as its population has stagnated.
Stagnant demand also impacts stocks.
Corporations as a whole have difficulty growing their revenue due to reduced demand. Meanwhile, the aging population desires to hold safer assets such as bonds instead of stocks as they enter into their retirement years.
The result is the Japanese stock market, as measured by the Nikkei 225 Index, is trading at the same level it was twenty years ago and it is still well below the high it reached in 1989.
Meanwhile yields on Japanese government bonds have steadily declined from over 3% in 1995 to 0.3% today.
The aging population has also led to a labor shortage, which has kept unemployment rates low.
Where There Is Growth
Despite these economic and financial challenges, Japan’s economy continues to grow on a per capita basis.
That means per person income is growing after adjusting for inflation, and because income inequality isn’t a major issue in Japan there isn’t massive poverty.
That’s why Japan looks prosperous even though the headline economic and financial numbers are dismal.
The National Debt and Potential Default
One area where the lack of overall economic growth has had a huge impact is on Japan’s national debt, which has skyrocketed as the Japanese government tried to fight the demographic headwinds with large stimulus projects.
Japan’s federal debt as a percent of its gross domestic product is 245%, the highest in the world.
Despite this large debt balance Japanese interest rates are some of the lowest in the world.
Skeptics say Japan’s debt is unsustainable and the country will eventually default.
Yet, when the debt balance is adjusted to reflect debt owned by the federal government and the Bank of Japan it is at a more manageable level of 80% of GDP.
What would happen if Japan defaulted?
Noah Smith, assistant professor of finance at Stony Brook University explained what would happen in a Bloomberg column,
“Sovereign debt is just an accounting exercise—marking down the assets of some Japanese people and marking up the assets of others. It would redistribute wealth from the old to the young. And after a default, Japan would still have all the same factories, all the same land, all the same people with all the same education. There would be plenty of short-term pain, fear, disruptions to the international financial system, but at the end of the day, Japan would still be standing.”
The economic wealth of a nation is its capacity (both human and mechanical) to produce goods and services. That wouldn’t change if Japan defaulted on its debt.
It is similar to a family farm whose ability to grow crops would be the same even if the adult children defaulted on the loan they owe their parents to buy the farm.
While it is easier to manage an economy if the population is growing, Japan, despite its challenges, shows a country can survive and be a pleasant place to live even if its population is shrinking.
