“The BOJ’s struggle to generate inflation can be explained by demographics. Things will get even worse (not only for Japan) and the global quest for yield will likely intensify. Can Africa save us?” – Source
The Bank of Japan’s struggle to generate inflation has been well documented, and it looks as if Governor Kuroda isn’t going to be able to achieve the bank’s targeted inflation rate of 2% anytime soon without adopting extreme measures.
Japan’s government has stepped in with a massive fiscal stimulus package to help the central bank try and reach its inflation target of 2% but analysts at Source Reach, the multi asset research firm believe that Japan is trying to fight a war it cannot win.
According to Source analysts (who worked with Albert Edwards at SocGen prior to starting the firm) , there is a clear correlation between the growth of the working age population and inflation.
A clear correlation between the growth of the working age population and inflation
Source presents a chart comparing the working age population and GDP deflator (a measure of general inflation) by country between 1980 and 2015, which shows a clear trend between these two metrics. For countries that have seen working age population growth of 2% or more per annum, the GDP deflator has been more than 6% per annum. However, for countries that have seen working age population growth of between 0.5% per annum and 1.5% per annum, the GDP deflator has been reported as being between 2% and 4% per annum.
UN data shows that Japan’s working age population grew at a rate of around 1.5% between 1950 and the end of the 1980s bubble. The working age population peaked at 78.3 million in 2000 and has since fallen to 71 million, an annualised decline around 0.7%. Between 1980 and 2015 the country’s working age population growth on an annualised basis has been around zero and over the same period, the country’s average annual GDP deflator has also been around zero.
So, there is a very clear trend between working age population growth and inflation. Unfortunately, demographic trends imply that Japan’s inflation problem may be here to stay. Indeed, UN forecasts show that Japan’s working age population will have shrunk to 50.4 million by 2050 and 38.7 million by 2100.
Will Africa save us?
Japan is in the only country that is facing such a demographic crisis. Source’s analysis suggests that China and South Korea will fare even worse. Germany, Italy, Russia and Brazil will fare better than Japan but much worse than the rest the world.
Thankfully, population growth in Africa and India will help the world’s population expand to 11.2 billion by the end of the century according to UN forecasts. The United States is also expected to escape the curse of the declining working age population this century. The growth of the US working age population is projected to average 0.2% per annum through the end of the century compared to a historical growth rate of 1.2%.
Does this all mean for investors? Well, aside from the obvious takeaway that Africa and India are likely to be the motor of the global economy for the next 100 years (Africa’s share of the world working age population is expected to rise from 13% today to 41% by 2100) demographic trends suggest that the search for yield will become more desperate during the next few decades. There’s also a case to be made for US economic growth as the country’s working age population continues to expand while the workforce in other developed nations shrinks.