I got involved in an interesting conversation and thread on Stockr recently. (If you aren’t aware, Stockr is a social networking sight for market geeks). I had posted a couple of comments on Dollar Yen and was asked to comment on an earlier thread. It had started in response to an article on Zero Hedge regarding Kyle Bass’s views on Japan. Bass is of the opinion that a complete collapse in Japan is inevitable, and has been for some time. To him it’s just a question of when it will come. He could be just talking his book, but a look at the data would seem to confirm this view. I believe this is a case where the raw data tells only part of the story.
The base case for a dismal view is logical enough. So called “Abenomics” is just doubling down on a failed policy, the argument goes. The Japanese government has been trying to reflate the economy for years, but with no success. These attempts have done little except increase the amount of Government debt. Japanese Government debt stood at 211.7% of GDP in 2012. For comparison, the US debt to GDP ratio was at 101.6% in the same year, and 20 years ago Japanese Government debt was 66.5% of GDP.
This is not just the result of more debt. Anemic economic growth has persisted despite these efforts, indeed some might say because of them; this could be taken as proof positive that too much Government debt has a negative effect on growth. There are, however, other factors at play in Japan. Perhaps the biggest is demographics. Japan, like all industrialized nations, has an ageing population, but they have another problem. For several years now, their population has been shrinking, with more deaths than births and negligible immigration. This is the problem that Bass and other doomsayers focus on when analyzing Japan’s prospects. Growing debt and a shrinking tax base is not a recipe for success.
I lived and worked in Japan for nearly five years and, while this doesn’t make me an expert, it does give me a little more insight than some who have voiced opinions on the subject. My experience would lead me to conclude that, while the problems in Japan are real and the government’s response is questionable, forecasts of a total collapse are a little over the top. Of course, not all Japanese people are alike, but the degree of cultural homogeneity in the country is striking, making generalizations about the Japanese hard to avoid.
There is a strong cultural identity in the country, a trait which cuts both ways in this debate. From a negative perspective, it means that bridging the population gap by immigration is less likely. Over time, however, the positives from this could prove to be the deciding factor. This is a society with a tremendous sense of collective responsibility and a strong desire to do the right thing. There is a respect for authority that is hardly surprising when the head of state is literally worshipped. I believe that national pride and this sense of responsibility to the common cause will lead to the Japanese population doing what is required to avoid catastrophe. That may involve increased spending, larger families or a combination of the two, but don’t underestimate their ability to change.
From an investor’s perspective, vague feelings should rarely be placed above empirical evidence, but one also shouldn’t ignore the bigger picture when looking at data. The conclusion on Stockr was that a short Yen, long Nikkei play still had some traction. I am inclined to agree, but betting on a total collapse in Japan isn’t for me.