How sovereign debt and pension obligations doom Japan’s economy

Dateline: Bangkok, Thailand

There are several countries that have reached the point of no return – ones with excessive debt, incompetent leadership, poor fundamentals, a complete inability to change, and many more undesirable qualities.

Arguably, Japan is at the very top of this list. I could quite literally write all day about the many problems it faces and why they will not be solved before the country is forced to suffer an economic collapse of massive proportions.

The third largest economy in the world, Japan has so many problems that it’s very likely the next global economic crisis will begin there. Investors and businessmen should pay attention.

Japan has a huge debt problem

Japan’s debt to GDP is now above 240 percent – the highest in the world. For comparison, Greece’s debt to GDP ratio now stands at 161 percent and the United States’ is 73 percent.

It’s to the point where 43 percent of tax revenue in Japan goes just toward paying interest on the national debt. The problem is inescapable and getting worse, not better.

Of course, that doesn’t stop the Japanese government from trying. Taxes have risen, and new ones have been implemented altogether in a futile attempt to curb the national debt’s rise. The sales tax rose from 5 percent to 8 percent in early 2014, and there are plans to eventually raise them even further to 10 percent.

Some economists have been more creative, making proposals such as a “handsome tax” so that attractive men will be poorer and women will be more likely to start a family with men that are considered unattractive, all while raising funds for the government to pay interest on its unsustainable debt.

This leads to the second major issue that Japan faces.

Older population strains pension pool

Last year, Japan’s population decreased by a record 268,000 people. Projections from the government show that the country’s population will fall from its current number of 127.5 million to 116.6 million in 2030, and 97 million by 2050.

At the same time, life expectancy and the percentage of retirees are increasing. The Japanese live longer than any other nationality, with the average life expectancy at 84.6 years old. The median age is also the second highest in the world (next to Monaco) at 44.6 years old.

This has led to more retirees than Japan’s pension system can reasonably be expected to handle. Payouts are being cut, the retirement age has risen by five years, and the retirement program is on the road to insolvency.

Fewer people in a country typically leads to a shrinking economy. An older population leads to less productivity. Both of these things lead to less of an ability for Japan to remain competitive and pay off its debt.

The bottom line is that a decreasing population, rising life expectancy, and lack of a sustainable pension fund will continue to haunt the Japanese economy and stifle any efforts to fix its countless other issues.

Recovery seems pretty much impossible

Even worse than Japan’s numerous problems is the fact that there is no way that they could reasonably be expected to recover from them.

In 2013, the Bank of Japan embarked on a massive stimulus program larger than the United States’ quantitative easing ever was – even though the total size of the Japanese economy is only around half that of the US.

Part of the reason for this policy was to intentionally devalue the yen. A robust export-based economy was why Japan boomed during the late 20th century.

By having a weaker currency, Japanese exports would be more competitive and the country could return to the strategy that once made it a roaring economic success, right?

Wrong. The difference is that this time, there is competition from China, Southeast Asia, and many other countries that can still beat Japan on not only price, but sometimes even quality, despite a weaker yen.

In fact, many Japanese businesses have decided to base their manufacturing and export operations in other nearby countries. This does nothing to help Japan’s exports, but businesses figure that if you can’t beat them, you may as well join them for the sake of your own profit.

The end result is that export numbers have continuously failed to meet analyst expectations. The devaluation of the yen has just barely boosted exports, let alone has it fixed the utter mess that is the Japanese economy.

Position too precarious for wise investors

Japan is not going to fall into total chaos tomorrow. Stocks have been on a run for the past several years, and investors will possibly continue to make money. Perhaps for quite some time, even.

However, when people finally realize the absurdity of having more than twice the amount of debt as your GDP, the danger of having a rapidly aging population, and the futility of trying to do anything about these problems – far more money will be lost.

If history has shown anything, it’s that the Japanese people are resilient. They’ve survived earthquakes, tsunamis, and nuclear bombs. It’s feasible that they could survive an economic crash and eventually come out of it stronger.

But when you’re a global investor, you have the entire world to scour for opportunities. It’s probably best to stay clear of Japan and choose one of the many better alternatives to invest in, while keeping a close eye on developments within the Land of the Rising Sun that may affect the rest of the world.

Last updated: Dec 28, 2019 at 5:17AM

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