Even as the S&P 500 has risen 20% over the past 12 months,
the champagne is really flowing in Japan, where the Nikkeiindex
is up a stunning 60%.
But it's time toput the cork back in the bottle. As my colleague
Joseph Hogue recently noted, the Japaneseeconomy holds the risk
of a deep blow-up.
Joseph focused on Japan's potentially ruinousdebt load and didn't
even touch on two other major concerns.
First, Japan's decision to end its use of nuclear power is
leading to a massive spike in fossil fuel imports. Japan now
looks set to run massivetrade deficits far into the future.
Second, Japan is aging fast. Consider these stats:
- Roughly 23% of Japan's citizens are now over 65, up from
11.6% in 1989. This figure is set to keep rising. (As a point
of reference, roughly 14% of all Americans are over 65, and
this percentage is expected to rise to 20% by 2030, according
to the U.S. Administration on Aging.)
- Japan's population is set to shrink 24% to 95 million by
2050, and a rising percentage of the populationwill be elderly,
according to the Japanese Health Ministry.
But the primary near-term concern for the Japanese economy, as
Joseph discussed, is the high debt-to-GDP ratio. Unless the
Japanese economy starts to grow at a faster pace, look for global
investors to again focus on this ticking time bomb. But Japan
isn't alone. Here are the 10 major economies with the
Even the typically cautious Germans sport an 80% debt-to-GDP
ratio, higher than the United States' 72%. It's anissue that will
likely dog all of Europe for many years to come.Smaller economies
such as Greece and Iceland could eventually seek towave the white
flag and welch on theirdebts , as Argentina did a decade ago. But
larger economies can't explore thatoption without risking blowing
up the global financial system.
Besides Japan, here are three other major economies that could
implode in coming years.
World's 5th Largest Economy
While German policy makers seek ways to help
businesses be productive (through stronginvestments in
infrastructure and flexible labor policies), French
policy makes life difficult for business at every turn
and will make the economy ever-less competitive. For
example, in the face of mounting governmentdebt and an
aging population, France had the chance to raise its
retirement age from 62, but recently chose keep that age
And France's 35-hour work week is still a third rail
for politicians. Any move to discuss boosting the work
week to 40 hours is quickly silenced. Frenchunemployment
benefits, which can approach the equivalent of $8,000 per
month for some workers, have also remain untouched.
Meanwhile, even as other European economies are starting
to generate slightly better economic trends, France's
industrial production continues to fall (dropping 1.4%
from May to June) and its unemployment remains at a
14-year high. Germany's Der Spiegel recently took
of France's ineffectual government policies.
"The French economy has been in gradual decline for
years, without any president or administration having
done anything decisive about it. But now, ignoring the
problems is no longer an option. The economy hasn't grown
in five years and will even contract slightly thisyear .
A record 3.26 million Frenchmen are unemployed, youth
unemployment is at 26.5 percent, consumerpurchasing power
has declined, and consumption, which drives the French
economy, is beginning to slow down, as well," noted Der
Spiegel's Mathieu von Rohr.
Simply put, the only way for France to chip away at its
high debt-to-GDP ratio is to boostGDP , especially
considering the country's persistent budget deficits.
Meanwhile, French corporations, which compete on the
global stage, are becoming less competitive due to high
labor costs and onerous regulations. And French voters
may seek to elect politicians that further hamstring
business by protecting one of the world's strongest
social safety nets.
World's 8th Largest Economy
Many of theissues affecting France are also in place in
Italy, where the economy is now 7% smaller than it was in
2007. The Italian government recently predicted the economy
will shrink a further 1.3% in 2014, as the downward spiral
shows no signs of letting up. (That view may be optimistic:
Italy'sCentral Bank anticipates a 1.9% contraction.)
Italy was once known as a leading manufacturer, and its
small companies produced a wide range of hand-crafted
products such as clothes, footwear and electronics. But in
recent years, countries such as Turkey have started to
supplant Italy, thanks in large part to lower wage rates.
And ever since it adopted the Euro, Italy no longer has the
luxury of devaluing itscurrency to make its exports more
Der Speigel's Hans-Jürgen Schlamp took a fresh look at the
Italian economy and noted that "one in two small businesses
was only able to pay its employees in installments. Three
out of five companies are forced to take outloans to pay
their high tax bills."
For countries like France and Italy, it may appears as if
these steady declines are being taken in stride and their
economies and societies can muddle through this period of
extended stagnation. Yet at what point might they reach a
tipping point, where massive debt loads, declining output
and rising social strife boil over into a full-blown
crisis? In that context, it's hard to fathom why investors
are bidding upstocks in these markets.
World's 2nd Largest Economy
To be sure, China possesses a range of virtues that
countries like France and Italy can only dream of,
including rising consumer demand, a world-class
infrastructure and pro-business policies. But China also
faces one major problem that is beyond the realm of any
policy maker: Its working-age population is shrinking.
According to China's National Bureau of Statistics (
), the amount of eligible workers shrank by 3.45 million in
2012. That spells the end of an ever-expanding work force
that had been driving China's economy for more than three
Clint Laurent, who works at research firm GlobalEconomics ,
recently told theEconomist magazine that the number of 15
to 24 year olds will shrink particularly quickly, dropping
by 38 million (21%) over the next 10 years. And fewer young
workers means employers will have to boost wages to fill
jobs, which may set off a cycle of uncompetitiveness where
factories in China close and reopen elsewhere in lower-cost
If this demographic shift indeed leads to a sharper
slowdown in the Chinese economy, then sociologists predict
a period of rising social unrest, as Chinese consumers have
tolerated massive environmental degradation and a yawning
gap between rich and poor. That could trigger deeper
strains on the world's second-largest economy.
Risks to Consider:
As anupside risk, a resurgent U.S. economy could help spark
firmer global economic activity, that could reverse the spiral
being seen in Europe and elsewhere.
Action to Take -->
As noted, European stocks have been rising at a solid clip in
recent years. As a result, investors should closely monitor these
potentially troubling trends.