Can the Bank of Japan fix the economic problem which is Japan?

Tonight or tomorrow depending on your location the Bank of Japan will announce the deliberations of its latest policy meeting. There is much for it to consider but before I come to matters such as interest and exchange-rates lets update ourselves on what is the main issue facing the land of the rising sun or Nihon.

Population Problems

Regular readers will be aware that Japan has particularly unfavourable demographics involving both an ageing and shrinking population. Earlier this month The Japan Times reported the latest data.

Japan’s population excluding resident foreign nationals fell last year at the fastest pace yet, down 271,834 from a year earlier to 125,891,742 as of Jan. 1, the government said Wednesday. The measurements have been made since 1968.

Okay so the problem has in fact accelerated and I am reminded of the song lyrics “what goes up must come down”.

It was the seventh straight year of decline, with the population sliding below 126,000,000 for the first time in 17 years, the Ministry of Internal Affairs and Communications said.

Here is some more perspective on the matter.

Japan’s population peaked in 2009 at 127,076,183 and has since been declining.

As well as a shrinking population Japan has an ageing one as described below.

People aged 65 or older accounted for 26.59 percent of the population. The elderly have grown in number every year since 1994, when the government began to collect the data.

The proportion of people aged 14 or younger was 12.82 percent and continued to shrink.

A little care is needed here as Japanese society tends to look after its elderly with more care and attention than us in the west. However the problem of ever more elderly depending on ever fewer workers leads to the concept of an ever more unstable inverse pyramid. Oh and it is revealing that the population is described as excluding foreign-born nationals.


Part of the third Abenomics arrow is supposed to be a reversal of the trend above and there is a minister for this Mr.Kato who presumably is not related to the housekeeper of Inspector Clouseau. As well as Minister of State for Measures for Declining Birthrate he is also according to Reuters last October responsible for this.

Abe unveiled the goal of building a “Society in Which All 100 million People can be Active” after his re-election as ruling party chief late last month………The 100 million level is where the government wants to hold Japan’s shrinking population over the next five decades, versus 126 million now.

It points out that this is reminiscent of wartime propaganda in Japan and of course militaristic themes are increasingly occurring there. For our purposes the issue is the acceptance of a population decline.

Mr.Kato has maybe had a little success if we return to The Japan Times.

There were slightly more births, at 1,010,046, compared with 1,003,554 a year earlier,

However the birthrate is officially targeted at 1.8 which is a long way from the present ~1.4 and even further from the 2.1 required to stabilise the population at 100 million according to some experts. There is an institute for this in Japan which is revealing in itself and its 2012 report told us this.

The annual number of births in Japan (Japanese) has declined from 2.09 million in 1973 to 1.07 million in 2010.

It made various forecasts depending on fertility rates that Japan’s population would decline to 100 million in either 2044,2048 or 2054.

National Debt

This of course is heading in precisely the opposite direction. This is unlikely to be helped by the plans to spend ever more as reported by Bloomberg.

The Nikkei newspaper reported on Tuesday that the plan would include 6 trillion yen ($57 billion) of new spending, although only about 2 trillion yen of that would be in a supplementary budget to be passed this year. The government was discussing supplementary spending of about 3 trillion yen ($28.5 billion) for the current fiscal year, two officials familiar with the talks said last week. Including loans and loan guarantees, the headline figure for the fiscal stimulus has been speculated at 20 trillion yen.

Only a day later the numbers were even larger according to the BBC.

Japan’s Prime Minister Shinzo Abe has said his government will introduce a 28tn yen ($265bn; £200bn) package to boost the flagging economy.

The problem is that Japan already had a fiscal deficit of 6% in 2015 which some might consider was a fiscal stimulus enough. Japan has had persistent large fiscal deficits and if they fixed the problem it would not be where it is! There had been some reduction in them caused by the raising of the Consumption Tax in 2014 but of course that sent the economy reeling backwards. This created quite a problem as according to the IMF the target was supposed to be this.

The authorities’ medium-term consolidation plan of achieving primary surplus by FY2020 should avoid relying on optimistic growth assumptions,

This has been a feature of the Japanese economic experience where money is borrowed to create future growth except that the growth does not turn up. An example of this is provided by the IMF GDP growth forecasts for 2016 which a year ago projected growth of 1.2% in 2016 and now projects 0.3%. In essence Japan continually goes on a hopeful journey on this front but the hoped for future never arrives.

On this road the national debt of Japan continues to rise and it is now around 230% of GDP according to the Ministry of Finance or 250% of GDP according to the IMF. In terms of numbers the Ministry of Finance had the total central government debt (including borrowings)  at 10,911,467 at the end of May which gets a lot worse when you realise that each unit used represents 100 million Yen.

The Yen

This was supposed to be one of the fundamental drivers of Abenomics and for a while it was. The fall in its value was badged as ending deflation by helping to create inflation as well as making the economy more price-competitive. Actually the issue of creating inflation was always a dubious benefit for me as it would reduce real wages. So we saw the advent of “Ivory Tower” style thinking in that it was assumed that wages would rise faster than inflation. They even brought over Paul Krugman from his New York Ivory Tower to give advice. The real world was not so accommodating and wages drifted along so real wage falls were created or exactly the reverse of the plans.

More recently the Yen reversed course and strengthened and the nadir of 125 Yen to the US Dollar of late spring 2015 has been replaced by more like 105 now. There is an irony in that the consequent lower inflation  has in fact helped real wages!

The oil price

Forgotten in this saga is that the lower oil price should be giving the Japanese economy an enormous boost. Where did that go? Back on November 16th last year I pointed out the scale of the gain from lower crude oil prices.

It is the third largest oil consumer and net importer in the world behind the United States and China. Furthermore, it ranks as the world’s largest importer of liquefied natural gas (LNG) and second-largest importer of coal.

With Brent Crude Oil at US $43  per barrel as I type this Japan should be full steam ahead.


There is much to consider here but I cannot see how any monetary policy move by the Bank of Japan overnight would help the Japanese economy. It has cut interest-rates into negative territory albeit only just (-0.1%) and is indulging in QE or rather QQE on a grand scale. It has also intervened in currency markets as well as trying to encourage Japanese businesses to borrow more. As I discussed in my article on the Japanese Whale it is also buying equity and commercial property ETFs.

There is however some fiscal space caused by the fact that Japan can borrow and be paid to do so. The ten-year yield is -0.27% and Japan was able to issue some 40 year debt at only 0.345% earlier this week. However there are two catches here. Firstly we are at such yields because of all the Bank of Japan buying and secondly if fiscal expansionism worked Japan would not be where it is.

Meanwhile on a per capita basis it is not doing so badly and perhaps it would be best to simply leave things alone and stick to  actually trying to implement the third arrow of reform.





14 thoughts on “Can the Bank of Japan fix the economic problem which is Japan?

  1. Japan reminds me of distances in space – the figures are so large that you cannot get your head round them…
    It is all so far from reality (QE/fiscal stimulus/debt levels/interest rates) that it is hard to know where to start. Add in the declining population and it seems even harder. Perhaps they should take in the Middle East refugees instead of Germany!
    Great article, as ever, but shocking how these types of mad economics now seem to be the norm.

    ps did you see the article in the Times (yes, mainstream media are catching up) about the rock and a hard place dilemma in Italy with its banking system in a little local difficulty?

    • Hi James

      The numbers are extraordinary and sometimes I write them down properly i.e down to one Yen and not a hundred million of them as a unit and it spreads nearly all the way across the page. As to the refugees that is a scenario which is unacceptable in Japanese culture. Of the human pyramid they consider themselves to be at the top.

      I haven’t read the Times in years so thanks for the tip. It is EBA bank stress tests day tomorrow so maybe they are trying to get ahead of that.

  2. Shaun,

    Any idea how much Japanese debt the BoJ is actually sat on?

    I read somewhere-possibly here-that it was circa 40% of issuance.Could that be possible?They have been QQQQEEEing for a very long time.

    • Hi Dutch

      Thanks for the Homer Simpson reference I was wondering if the bit where the radioactive waste bounces down the street might get a mention?

      As to your questions the FT published some data saying it was 35% of the total JGB stock and 64% of GDP earlier. According to the Bank of Japan it is holding some 380.104,211,045,000 Yen of JGBs. Just for comparison its gold holdings are 441,253,409,000 Yen.

  3. Hello Shaun ,

    Considering what else is around it still looks like the yen is a “safe” place (!)

    as for QE and debt , when the BoJ owns over 90% or more then what?


    PS : “… if fiscal expansionism worked Japan would not be where it is. ”

    can someone send a memo to the FED and the BoE ?

  4. Hi Shaun

    If you combine the demographic profile and the vital statistics and add in the cultural exclusivity that is the Japanese way and you do not have so much as an economic problem; you have a society on its way to extinction, quite literally. As you imply the 100 million target is whistling in the wind.

    If this is true, and it seems to me it is, then any talk about suitable economic measures or the balance between monetary and fiscal policy or that Japan has an astronomically high debt ratio has a curious air of irrelevance about it: the problem is much more basic.

    If I were there I’d be going full bore down the automation/AI route in terms of economic measures and to hell with the fiscal consequences; things are clearly on a track whose only end is a black hole anyway.

    • Bob 127 million people stuff onto islands not much bigger that the UK is not a good idea

      dropping the population whilst maintaining exports ( via more robots ) is the path they have chosen as you state.

      the money they owe appears to be owed to themselves mostlyy anyways – I wish I could say the same for the UK !

      what plan do we have still ? houses !


  5. We were musing on this angle on the Italian banks thread the other day as the productivity figures show just Japan of the major nations below UK (which =100), while even the Italians managed 110! I wondered if two factors were the extent of the whole population being included (25% of the pop over 65 is a heavy burden) plus as Bob J mentions, the bottlenecks caused by the population being on the edges of the island. I wonder what the next population cohort 40-65 looks like as they will be the 65+ in 25 years.
    It is of course another issue related to the cost of housing that most couple have to work to afford a half-decent house in the UK and so, tend not to have so many children, which is what we need fundamentally. The only alternative is immigration (Japan doesn’t seem to allow much) and that just puts pressure on the housing stock in the short term at least.
    It is really a case of where Japan leads with this ultra-loose monetary policy, the rest will follow. I was this surprised to find this on Conservative Home (which is a fundamentalist Tory site).
    It seems everyone can see the problems, but no-one is prepared to take the measures required.

    Listening to my home side Aberdeen playing Maribor – they have some bloke called Tavares – hopefully “It only takes a minute” for the Dons to score!

  6. The BOJ can’t fix a deficit borrowing problem. That is the politicians job. Less pork barrel roads to nowhere and higher taxes to pay for the last few decades of wasteful overspending on roads to nowhere.

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