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.
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.
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.
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.