Japan’s Demographic Time Bomb – Part II

Why is a population decline a serious issue? Because if the population is declining, then a number of events will eventually follow as night follows day.

In Japan’s case their elderly people tend to be long-lived, they require a lot of expensive care to maintain their accustomed standard of health care. In the past, when there was a lot of people in the workforce and a small number of elderly people, this was easily handled – taxes from ~60% of the worker-class population more than easily covered the costs for the ~5% of the population that was in old-age care.

When that ratio is reversed, and ~40% of the population is “retired” compared to only ~52% of the population in the work-force, and there’s a massive debt that needs to be serviced, in addition to all the other services provided by the government, something has to give.

Japan as a country has a debt / GDP ratio of over 200% – in other words it owes more than double what the entire country produces in economic output each year. To draw an analogy – assume John Public owes $10,000 on a credit card balance. If he makes $5,000 a month, that loan will be a lot harder to pay back than if he makes $10,000 per month. The same holds true for the sovereign debt of countries – a larger GDP means the country can borrow more money and make payments on any existing loans.

So how does a country get out from under a crushing debt load like this? The typical wisdom is for it to increase the country’s overall economic activity, this will reduce the country’s debt to GDP ratio, thus making the overall debt load easier to carry. When the population base is increasing through natural births or immigration, this will happen as a natural effect of people working to improve themselves and care for their families. When the demographic realities are such that a good portion of the population is retired or too young to work, and jobs go wanting for lack of people to do them, then the end result is a lower year-over-year GDP along with an increase in the the debt to GDP ratio. This also means a larger proportion of the national budget will go to debt payments, which, in combination with other factors, can trigger a government default.

What is sad about this story is that it could’ve been avoided. Japan as a country has allowed abortion since the implementation of the 1966 “Maternal Health Protection Law.” Forty-eight years later, the people who passed this act are now reaping the wind as the generation of the children they destroyed, the children who would now be adults and could’ve continued the economic activity required to care for their parents – were killed in their mother’s womb. So profound is the problem that Asahi Shimbun has proposed to solving the low birth-rate problem by banning abortion completely:

With 200,000 pregnancies being terminated per year, if we are to counteract the falling birthrate, then we must begin there. I intend to have this reviewed in the party’s Special Committee on Population Decline in Society following the Upper House elections. We will not only prohibit abortion, but instead of prohibition we must also create laws (to mediate) child adoption, and prepare an environment in which children who are born can be brought up in society.

In conclusion, while Japan’s got some some serious social / policy problems in it’s future – what are the implications for people in the United States – or other countries? I posit that a Japanese debt default has some serious implications:

  1. Currency crisis – a Japanese default would crush the value of the yen, making it more costly for Japanese buyer to import goods, and resulting in inflation as people demanded more for their labor in order to keep up with rising prices,
  2. If Japan as a major buyer for US debt were to stop buying US debt, then the market supply of US Treasuries would see a substantial increase. The US government would then need to pay a higher yield on it’s bonds in order to attract other buyers, which would result, in turn, in a rise in US interest rates. Higher US interest rates would have a negative impact on the US housing market, which even now is struggling to find buyers.
  3. As of Jan 4, 2015 Japan currently holds more than $1.22T of US Debt. In order to import the goods Japan needs, it’d be very tempting to sell US dollar treasuries for needed goods, putting further supply-side pressure on the US Treasury market,
  4. Japan’s ability to influence international politics would be negatively affected, and with it the balance of power between Japan and China,
  5. Should Japan and China get into a shooting war, the US would invariably be pulled into the conflict,
  6. Because a large portion of the bonds are held domestically by banks and the elderly who need a safe place for their money, a collapse in bond values could trigger bankruptcies in a number of Japanese banks and with it the evaporation of their depositor accounts. This is similar to what happened during the US financial crisis caused by the US sub-prime mortgage meltdown / financial crisis which triggered a wave of domestic and international bankruptcies across the globe.

As dire as these prospects look, it’s only a guess on my part what’ll actually happen. That Japan’s going to implode is a given, and in some quarters, there’s already talk that various Japanese organizations are quietly moving their funds into foreign-currency denominated assets before the government defaults and all that that entails.

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About A Northern Observer

Joe Random Guy who lives north of a lot of things. My image is from the National Archives - Battle of Britain - Aircraft spotter on the roof of a building in London. St. Paul's Cathedral is in the background. 306-NT-901B-3. http://www.archives.gov/research/military/ww2/photos/

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