Tag Archives: japan

Why Japan can become an economic star of the 21st century

Summary:  Today we look at the future of Japan, and speculate at how well it will cope with the new industrial revolution. Their unique strengths (sometimes wrongly considered weaknesses) suggest that the 21st century might see the sun again rising over Japan. America too will face this challenge; we should watch and learn from Japan.   {1st of 2 posts today. It is a revised version of posts from 2013 and 2014}

Contents

  1. A falling population is a boon for Japan
  2. A new Industrial Revolution
  3. Japan: suited to be a star of the 21st Century
  4. For More Information

 

(1)  A falling population is a boon for Japan

Japan’s government has worried about its overpopulation since the Meiji Restoration when they had about 3 million people (1868). They encouraged emigration to Korea, to no effect. They had 50 million in 1910, 100 million in 1967, and a peak in 2008 at 128 million — all crowded into a narrow urban belt along the coast. At their current level of fertility, by 2100 their population might be half of today’s, back to the level of 1930.  If fertility continues to fall, population might fall to 60 million (1925) or even 50 million (1910).

The effect on Japan’s environment would be wonderful. Japan could become a garden with the cleaner technology of that future era (a common question in grade-school history will be “Teacher, what is ‘pollution’?”).

See this graph showing the coming evolution of the age distribution in Japan (source; see more information from their National Institute of Population and Social Security Research).

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Updating the recession watch; & what might the government do to fight a slowdown?

Summary: The economic data continues to darken. Let’s review the situation — updating the recession watch — and guessing what might be the government’s response to a recession. It’s an era of new normals, so we should expect steps that would have been considered incredible or even mad a decade or two ago.  {1st of 2 posts today.}

“Toto, I’ve a feeling we’re not in Kansas any more. We must be over the rainbow!”
— Dorothy in “The Wizard of Oz”.

Economy

Contents

  1. The bad news
  2. Worse news
  3. The weak data
  4. What comes next?
  5. For More Information
  6. Perhaps a better world lies ahead

(1)  The bad news

The graph below gives an ugly forecast. But let’s keep this in context, especially now that the doomsters have discovered it. The value of the Atlanta Fed’s GDPnow forecast is its immediacy. They explain that it’s no more accurate than forecasts by economists or other models. Which is to say it’s a best guess made with limited information. Also, the Fed remains hopeful that Q1 is an aberration, so that 2015 has growth of 2.3% – 2.7%.

20150317 GDPnow forecast

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For Japan there is no road but to an economic recovery

Summary: the most contrarian thing you’ll read today.

Japan was a big story in 2014. The hopes for its rise — quickly crushed — created ripples around the world. Today’s post features an article by an expert asking if a new phase in its recovery story will unfold in 2015. A recovery in Japan would give the world economy another locomotive. The data looks provocative and the reasoning seems profound. (This is the 2nd of today’s two posts.)

“If something cannot go on forever, it will stop.”
— Herbert Stein’s Law (US economist, 1916-1999)

Japan: setting sun

A setting or rising sun?

Keiki Kaifuku, Kono Michi Shika Nai
“Economic Recovery,
There Is No Road But This”
—  LDP Campaign Slogan, December 2014

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By Peter Karmin of Fort Sheridan Advisors

From the Drobny Global Monitor, 11 December 2014

Posted with the generous permission of the author and Drobny Global Advisors.

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For years – if not decades – Japan’s shrinking demographics have been a primary cause for that country’s lackluster economic growth. However, Japan is now reaching a point in its cycle where the population shortage — combined with a scarcity in natural resources and the effects of “Abenomics” – will cause stagflation rather than deflation. This is a structural rather than cyclical change resulting from a shortage in labor and natural resources. The former is a result of declining population/workforce along with stringent immigration laws and the latter is a result of the closing of nuclear power plants following the 2011 Tohoku earthquake and tsunami.

During the past few years, Japan’s unemployment rate has gradually dropped and is now at 3.5% which is the lowest since 1997.

Japan's unemployment rate

Drobny Global Advisors, 11 December 2014

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Additional signs of improvement within the labor sector are seen in other surveys. For example, the “Jobs-To-Applicants Ratio” is now at a level (1.1 job openings/applicants) not seen since June 1992 when 10-year Japanese Government Bonds (JGBs) yielded 5% (we have only had to move the decimal over to the left one place during the past 22 years):

Japan: job to applicants ratio

Drobny Global Advisors, 11 December 2014

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Recent Bank of Japan Tankan Surveys show that both the manufacturing and non-manufacturing sectors are finding a shortage of available workers {DI: diffusion index}:

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What might the failure of Abenomics mean for Japan? Big, unpredictable changes, perhaps with a happy ending.

Summary:  Japan has remained in economic stagnation for so long we have come to consider that as normal. It’s not. Slow decay of a nation eventually ends in reform (as expected in Japan by experts for 2 decades) or regime change. Abenomics aroused excitement as the start of powerful reforms, as Japan’s last chance. The past few months’ data suggest that failure lies ahead. If so, after that will come exciting and unexpected events (but not necessarily beneficial or pleasant events). They will affect the world (especially if Japan walks a path on which America and Europe follow). Let’s review the evidence, and look ahead to the possible happy ending.

“GDP figures for July-September turned out not so encouraging.”
— Prime Minister Shinzō Abe, 17 November 2014 (source: Reuters)

”The war situation has developed not necessarily to Japan’s advantage …”
— Emperor Hirohito of Japan in his first radio broadcast, 15 August 1945

Japan: setting sun

Contents

  1. Dark day for Abenomics
  2. Implications
  3. What’s the problem with Japan
  4. The bad news, and the possibility of a happy ending
  5. For More Information

(1)  Dark day for Abenomics

In the dark days before Abenomics, as Japan neared the quarter-century milestone for stagnation despite massive economic stimulus (running the government’s debt up to incredible levels), experts wrote that “Something is wrong with Japanese politics“, and about the necessity of “Restoring Political Stability“.

Abe has been prime minster since 26 December 2012. His political strength came from the desperation of his people after almost a quarter-century of the hopes of recovery he aroused, and his bold measures to revitalized Japan (“Abenomics”). Now that Japan enters a triple-dip recession, let’s turn from Wall Street’s happy outlook to ask about the effects should Abenomics fail? And it is failing, despite strong corporate profits and massive stock market gains, as described in this report by Alhambra Investment Partners: “The Inevitable End“.

Japan: real GDP, QoQ, SAAR

Real GDP, from Alhambra Investment Partners, 17 November 2014

Perhaps even worse, Abenomics has lowered the value of the yen. While wonderful for corporate exporters and good for their workers, this has proven horrific for everybody else as the cost of imports rises faster than wages (and faster than fixed incomes, such as pensions) — without the promised economic acceleration. Another recession will further increase stress on people, as the yen drops even more — with even less offsetting job and wage growth. This trend cannot continue without ugly consequences.

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Listen to the slowing US economy, hear echoes of Japan

Summary: Now in its sixth year, this sorry excuse for an expansion is ready to boom — accelerating to “escape velocity” — according to many economists. Or perhaps the boom grows old, even sclerotic, so we should start watching for the next recession. The consensus of economists never sees a recession until it begins, so we’ll have to find other ways to look ahead. This post describes one such: the economy slowing to its “stall speed”. This alarm might be flashing yellow, or even red, now.

Recession

A warning. AP Photo/Mark Lennihan

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Contents

  1. Echoes of Japan
  2. What is “stall speed”?
  3. One reason we don’t grow
  4. For More Information

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(1) Echoes of Japan

Economic Cycle Research Institute (ECRI), 22 September 2014 — Opening:

In 2011 the Fed published a study aimed at identifying “particular values for output growth and other variables, such that when these values are reached during an expansion, the economy has tended to move into a recession within a fairly short time span.”

The study concluded that Gross Domestic Income (GDI) – which, while income-based, is theoretically identical to Gross Domestic Product (GDP) – “provides a better measure of output growth than GDP,” and identified a two-quarter annualized real GDI growth rate of 2% to be the “stall speed” threshold.

… this GDI growth measure (see chart) has now stayed below the 2% “stall speed” threshold for three straight quarters starting in Q4 2013, which is much longer than the duration of the harsh winter weather. …

Real GDI crashed below 2% SAAR in Q2 2006. Before this cycle, since 1947 real GDI had fallen below 2% only once in a period not associated with a recession – in Q1 1993. Real GDI is now below 2% YoY. For the past 3 quarters (and 4 of past 5 quarters) it’s been below 2% SAAR on a QoQ basis.

(2)  What is stall speed?

The concept of a “stall speed” is that the economy slows in the year before falling into a recession, and there is a critical speed below which the economy is likely to fall into recession.

The idea of a “stall speed” became know after a 2011 Fed paper by Jeremy J. Nalewaik, who showed that it predicted recessions better than other methods — and better than the Blue Chip Economists’ Forecast.  It appears seldom in Fed research after several other articles in 2011, such as these by the Cleveland Fed and the Atlanta Fed).

On the other hand, several studies have been skeptical about the concept, such as this 2012 BIS working paper which questioned even the aeronautical analogy.

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The easy way to understand unconventional monetary policy

Summary:  It’s difficult to describe the magnitude of the monetary policy experiments now running around the world, most especially in China, USA, and Japan. At the end are links to a dozen posts attempting to do so with words and numbers. Today we do it with pictures.

Money world

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The monetary stimulus programs running around the world are in effect leaps into the future, leaps of a scale never before attempted, leaps beyond theory. Should they work the world will changed, for these tools — massive quantitative easing and extended periods of zero interest rates (ZIRP) — will be used again. And again.

How can I show you the fantastic nature of these experiments? How they move far beyond what’s been considered possible — even prudent — in the past. How their success would create a new world? And, most difficult, how the programs of each nation differ in scope and daring?

Let’s use picture to show this, as metaphors.

First, the below picture shows America’s monetary policy: five years of ZIRP and three rounds of quantitative easing — designed by the four hundred economists of the Federal Reserve System, using unconventional means to press conventional theory beyond its limits — to rekindle the power of the American economy.

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Fusion and Dr Octavius

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Second, we see Japan. They’ve had zero or near-zero interest rates since February 1999 (with intermissions), and several rounds of quantitative easing since March 2001 — attempts to re-ignite their economy since it flamed out in 1998. The latest is the three arrows of Abenomics (often described in different ways), announced by Prime Minister Shinzo Abe in December 2012.

  1. More fiscal stimulus, increasing the government’s deficit by 2% of GDP (to 13%).
  2. More monetary stimulus: doubling the money supply in 2 years to create 2% inflation.
  3. Structural reform — broad, deep, powerful (so far missing in action).

Abenomics is the desperate action of leaders who have tried everything in the playbook, and now tap unimaginable energies to unleash arcane regenerative forces that can revitalize Japan’s economy. They go beyond theory, a leap combining faith and science.

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Must our population grow to ensure prosperity?

Summary: Economists are often criticized for excessive focus on monetary measures for a nation’s prosperity, and too narrow and backwards-looking vision of trends in society. Today we look at example of both: recommendations that Japan increase immigration. These matters affect not just Japan, but much of the world.

Now everything’s a little upside down, as a matter of fact the wheels have stopped
What’s good is bad, what’s bad is good, you’ll find out when you reach the top
You’re on the bottom

— From Bob Dylan’s “Idiot Wind” (1974)

Stand by for a boom!

Contents:

  1. Japan leads us to the future
  2. Japan faces the robot revolution
  3. Why recommend more immigration?
  4. For More Information

(1)  Japan leads us to the future

Fewer people is good news for Japan! (source)

Japan's population

Many economists look at this data and conclude that Japan needs more immigration, otherwise their national income (GDP) will fall along with their population.

Economists prescriptions for Japan show the limits of economics as a guide to public policy. GDP is not the only measure of a nation’s well-being, or even the best. Worse, economists sometimes see only linear trends of the past, blind to future developments visible even today.

(2)  A crowded Japan faces the robot revolution

Japan has been crowded for over a century. Japan’s government has worried about its overpopulation since the Meiji Restoration (population ~3 million) in 1868 (their attempted solution was encouraging emigration to Korea). They had 50 million in 1910; 100 million in 1967, and 127 million today.

Excerpt during periods of great productivity improvement (e.g., during an industrial revolution), growth in total GDP requires a growing population. More housing, more public infrastructure, more consumption. A shrinking population not only requires less of these things, but also a rising dependency ratio (i.e., the labor force falls as a share of the population). All bad things. Hence economists’ advice to maintain or even grow Japan’s population.

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