The Japanese economy shrank in the third quarter. Poor export performance combined with a small reduction in demand at home to produce a 0.3% contraction. Japan is quite exposed to the dangers of the trade war, with good exporting companies needing a favourable background for their products. It also finds it difficult to expand domestic demand, given the age of the population and the long shadow cast over it by its own spectacular banking and property crash thirty years ago.
Japan is a land of contrasts, a country of massive debts and little inflation. Since the crisis the Japanese authorities have run expansionary budgets, building up a huge state debt now at 253% of GDP. They have pursued a very accommodating money policy with interest rates around zero. They have created lots of new money and undertaken bond-buying programmes. The Japanese state has now bought in some 43% of the state debt, meaning the effective debt is now at a still-large 144% of GDP. The Japanese authorities feel they ought to move towards a more normal policy. Recently, they have been buying in fewer bonds and allowing bond interest rates to drift up a little. The government has also said it intends to put through an increase in the consumption tax from 8% to 10% to start to cut the government deficit. Currently the state spends 4.5% more of GDP than it raises in taxes, leading to more borrowing. It wishes to cut the budget deficit to 3% by 2021.
The last time the government increased the consumption tax, from 5% to 8% in April 2014, Japanese consumers reacted unfavourably. A sharp rise in spending before the tax increases was followed by a long period of reduced sales, slowing the economy more than was intended. This time the government is thinking of keeping the tax rise away from most food. It is also talking of retailer reward schemes to rebate the extra 2% for a bit to cushion the blow to spending. It looks as if just the threat of a higher tax will be another factor discouraging the consumer. Japan has a different population structure from many countries. It has the oldest population in the world, with an average age of 46.3 compared to the UK’s 40. It has a very low birth rate, and little inward migration. As a result the population keeps falling, and getting older on average. The UN thinks the population of 126.8m currently will fall to just 85 million by 2100, unless birth rates or migration suddenly change. An older population are less inclined to buy more things, and more inclined to save for even older age. It is true Germany and Italy have a population with an average age of 45.9, but they have allowed much more migration in recent years.
Japan is blessed with low levels of unemployment thanks to the low level of migration and the low birth rate constricting labour supply. Japan still has some important large companies that own very efficient modern factories making high quality popular goods. The per capita performance of the economy has been better than the general figures quoted. Last year there were almost 400,000 more deaths than births.
Japan has stayed financially stable in recent years despite the large debt build up. The country has a relatively-strong balance of payments and does not have overseas debt problems. It owes the debt to itself, and has made the debt tolerable by holding interest rates low or even negative. Japanese shares look relatively cheap, and the currency could offer good value after a long period of currency decline. The Japanese stock market has suffered like others in the recent sell off, and has been adversely affected by a somewhat tighter domestic policy and by the trade war. All the time the Japanese authorities remain wedded to the idea that they need to take some small steps towards a more normal money policy and towards cutting the budget deficit, it will be a headwind for the share market. Any relaxation of policy as the government comes to worry about the poor rate of growth would be a welcome boost.
The above article was previously published by Charles Stanley on 16th November 2018