Pathfinder Monthly Commentary: Investing in Japan – an emperor with new clothes?

Japan is the world’s third largest economy but on many economic and demographic measures it does not look like a compelling investment destination.  Here’s a quick economic roundup:

• Staggering debt levels:  Japan’s government debt to GDP ratio is an eye-watering 233% (the highest in the developed world – not even Greece or Ireland can match it). Total debt (being public plus private) to GDP is 500%.  If its’ near zero interest rates rose to 2% then almost all government revenue would be swallowed up servicing debt. 
• Zero growth and deflation:  Japanese equities surged through the 1980s before collapsing in 1989.  Its economy has since been gripped by a death-spiral of zero growth and deflation.  In fact it has not grown in real terms - the “lost decade” has continued for 23 years. Deflation discourages spending (because the price will always be cheaper next month) meaning the velocity of money circulation slows and so does economic activity.

Like most OECD countries Japan lives with unhelpful demographics and in particular an aging population.  Unfortunately their problem is extreme, with 30% of the population now over 60 years old.  Below we show the working age population as a percentage of the total population – this ratio has been in decline since the early 1990s.  This is not a recipe for economic success: