There is a major societal trend taking place that will impact the developed world in a serious way. Japan is on the leading edge, but other nations will soon catch up, a UBS report notes. The “lost decades” of Japan, where monetary gymnastics have tried everything except one solution, might be a leading export of the island nation due to an ever aging world population.
The aging of a society is document-able with highly correlated economic attributes
When looking at the ratio of those dependent in society to those working, Japan had peak workers in 1990. Since then the society has been aging and along with this demographic event comes a decrease in income earning employees and an increase in retirees.
In the resulting period, Japan experienced two “lost decades” of general economic stagnation. Japan is looking to lead the trend. Most of the developed world followed suit, peaking mostly in the 2005 to 2020 range.
This macroeconoimc trend only gets more challenging with age, the September 1 report from UBS Japan analyst Daiju Aoki notes, attempting to explain why the issue occurred and point out that the problem is spreading.
“The 'Japanization' of the global economy marked by transition to low growth and low inflation has started to attract investor attention as a phenomenon in recent years,” he wrote, pointing to the core of Japan’s problem. “There has been scarcely any nominal GDP growth over the past 20 years in the Japanese economy.”
Demographics are triggering the lack of GDP growth
As a society ages, its population becomes more dependent on government services and less productive in terms of generating goods and services.
“Demographic changes can be blamed for triggering this,” Aoki observes, then he points to the more troubling global trend. “…and many developed and developing nations could follow the same demographic pattern as Japan's from the 1990s.”
Japan has famously been struggling with bringing its economy back to life. “Abenomics,” an economic philosophy associated with the monetary gymnastics of the government of Shinzo Abe, is built upon no less than 25 different versions of economic stimulus packages over the two decades.
Although some have disputed the notion of Japan's lost decade, the stock market tells the story with numbers. At its peak, the Nikkei 225 was trading north of 37,000 as the market was approaching 1990. When it hit the old age market, the market reacted marching in a steady downtrend to double bottom near 7900 just after the financial crisis, losing nearly 500% of its value.
There have been decided trends within Japanese stocks. The pharmaceutical industry, best suited to benefit from a retiring population, has been by far the most important beneficiary since 1996, just after the peak in economic contributors outnumbering the non-working population. Banks, securities and steel were the losers.
Today the indicator of Japanese stock market health stands at 16,925, more than double the bottom but a long way from the peak years when the society had more workers than retirees. The S&P 500, by contrast, appears to be nothing short of a phenomenal prosperity story.
This trend could be about to change.
Demographic trend change is upon the world, can a helicopter experiment in Japan work?
How does one identify a trend change?
It can quite often be seen in the internals that are not often publicly discussed. In the case of trends, the force of trend is what starts to lag with correlation factors pointing to a sagging trend line. In fundamental analysis there are mathematical signals and then there are less than clear signals. With demographics, the trends are reasonably clear and documented and don’t’ magically change. The growing problem of aging on a society is documentable, as are the correlated impacts.
“The GDP gap remains negative in many countries, despite accommodation through monetary policy, and scarcely any developed nations have reached a 2% inflation rate,” the report notes.
UBS is noting that regardless of the monetary gymnastics and experiments with negative rates that can’t be modeled due to no relevant past history, the demographic factors are clear.
“On the economy, we have been asked several times about how long trends in consumption by seniors will continue, and there is great interest in this,” he wrote, pointing to investment opportunity. “The baby-boomer generation is already reaching 65– 70, and it will be important to identify trends in consumption as seniors' average age rises.”
The message from Japan is one that the developing world, specifically in the US, might do well to consider. Are other developing regions heading for a lost decade? “Population decline and rising social security costs as society ages will continue, and growth will also be needed to establish sound public finances and a sustainable social welfare system.”
With talk about faulty accounting standards in how social security and other government programs are accounting being an issue in certain quarters, the issues raised by the likes of Boston University’s Larry Kotlikoff and hedge fund managers such as Stanley Druckenmiller frame the issue with notable bookends.
What is the solution for Japan? Instead of adding to government debt, the answer might be helicopter money, where instead of buying financial assets central banks more directly influence the regional economy.