According to Ambrose Evans-Pritchard Japan is quickly turning into developed world’s sickest economy and could soon tip into an uncontrolled downward spiral. Evans-Pritchard reported last week in the Telegraph that Japan is reaching the point of no return where it won’t be able to meet its obligations and could enter a debt death spiral.
While Evans-Pritchard is one of my favorite writers, at the end of the article he comes to the wrong conclusion about what the West should learn from Japan. Evans-Pritchard suggests that too much government spending resulting in too much debt is the root cause of Japan’s problems and that the West needs to take notice and get government spending under control. While Evans-Pritchard is correct that Japan’s debt habit is unsustainable, the country’s debt problems are the result of its population imploding and the fuse finally burning out on its demographic time bomb. The Land of the Rising Sun is in trouble because it suffers from an insular society that discourages immigration and implicitly encourages low birth rates. For the last 50 Japan has been slowly committing demographic seppuku and now the inevitable is taking place, i.e., Japan’s population is crossed the tipping point so that its work force is both relatively old and shrinking and as a nation Japan can’t sustain its standard of living.
It shouldn’t be a surprise to anyone that Japan is facing deflation, falling domestic demand, stagnant to shrinking GDP and, as of recently, a low national savings rate. They are all the result of Japan’s bad demographics.
Virtually all economics students learn that when the work force of a nation shrinks it is difficult if not impossible to sustain economic growth and a vibrant economy. Also, retirees tend to consume less than families that are raising children and as each generation ages towards retirement it tends to consume less and less causing domestic demand to shrink. Aging populations also have low savings rates because most retirees continue to spend (particularly on healthcare) but stop working and cash out of their retirement nest eggs to live.
If the Japanese economy keeps on tracking demographic models, its problems will worsen until eventually a there will be an unsolvable crisis. There is inevitability that Japan will continue to decline and only radical social reform will change the outcome.
The lesson that the U.S., EU and Great Britain needs to learn from Japan is that every country’s population is the feedstock for its economy and if we don’t take care to make sure our population is dynamic, healthy and growing sooner or later bad economic things will happen. In Japan’s case, large structural deficits are the byproduct of bad demographics and not the cause of its problems.
Julien Peter Benney
I have long known of Japan’s many problems, and it is a very interesting case study. Japan has historically not had the generous welfare systems of Europe, Canada or New Zealand, and its population has frequently worked to a much older age than those nations.
The viewpoint that privatisation and drastic reductions in government spending is the only answer to Japan’s problems is one that I am familiar with from Austrian economists like Thomas Woods. Hans-Hermann Hoppe argues that Japan’s (and Europe’s, Canada’s and New Zealand’s) demographic problems are themselves the result of too-big a government discouraging children. However, I am by no means sure that the industrialisation of all these nations could have had a different result — simply because of the popularity of socialism as soon as poor, densely-populated nations industrialise means keeping government spending at levels Hoppe would consider acceptable stands as impossible.
As a long time resident of Tokyo, I have come to feel that a declining population might not be too bad. More space, more resources, more jobs and more to do for the younger generation. Is there not such a thing as a ‘sustainable‘ population for any certain mass of livable land? We apply strict principles for forestry management and when it gets out of whack, there are immediate consequences. It is the same issue with economies: stability and sustainability are more important than growth.
Economies: Affects and Effects: Japanese Demographics, Glide Path, Unemployment, Jim Chanos Slide Show, Asset Reflation
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