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Japan’s Darkest Days Lay Ahead
Ryan Cole, The Investment U Research Team
Bet against Japan.
It pains me to say it. I lived in Japan for five years – great years. I love the country, I love the people, I love the cherry blossoms in spring and the festivals in the streets and the poetic dewdrop in my window each morning.
But right now, I hate Japan’s economy. Here’s why:
1. It’s an exporting country, and nobody’s buying.
The American savings rate has gone from 0 to around 5%, and it’s still rising. Remember, this is with U.S. unemployment hovering just under 10%, officially. And, with furloughs and cost-cutting measures, the average work-week for the “fully employed” has fallen to 33 hours – the lowest number on record. So a 5% savings rate of a markedly smaller income pie, equals the collapse of disposable income spending.
That fact can be seen in the U.S. trade deficit – which was only $25.96 billion in May, the lowest number since 1999 (and less than half the deficit at its peak). That entire imbalance could be erased if we stopped buying foreign oil – but that’s not happening anytime soon. Instead, Americans are delaying purchases of things like LCDs, new appliances, new cars – all the things Japan sells us.
Of course, China became Japan’s largest trade partner during the past decade – passing the U.S. for good in 2007. But China simply doesn’t have the demand to buoy Japan’s flagging exports. In fact, China is closing factories, and the long migration of countyside peasants to the cities – and middle-class status – has reversed. Young workers who’ve lost their jobs are returning to their ancestral homes, where rent is cheap or free. They aren’t buying Blu-Ray players or new TVs anymore – at least, certainly not Japan’s expensive name brands.
2. The economy hasn’t been healthy for years
By now, most know that Japan’s ‘lost decade’ never really ended. They’ve been talking about ‘green shoots’ for years, but Japan’s GDP growth has, in truth, just been sputtering along, occasionally growing by up to 3%, but usually flat or contracting.
Japan isn’t like the outside world imagines. There are tent cities set up throughout Osaka, the industrial capitol. Thousands live in makeshift huts under bridges in western Japan. This despite the fact that, contrary to popular belief, rents in cities like Kyoto are cheaper than in American equivalents like Boston (Tokyo is another world). And despite the fact Japan has low unemployment (5.2%). Japan is sick.
The IMF recently projected Japan’s GDP to sink 6% this year. Instead, Japan’s GDP shrank at a 14.2% annual rate in the first quarter of 2009.
There are a number of government programs attempting to stimulate consumption, and some are showing modest results. A tax rebate of $125, and economic encouragement for consumers to buy newer, more energy efficient products, both have brought on a bit of spending.
Meanwhile, factories are increasing production slightly, in hopes that some of China’s $586 billion stimulus will find its way to Japanese companies.
But those are exactly the sort of ‘green shoots’ that have been leading economists astray for years. Don’t be fooled – Japan went through its housing bust 20 years ago, and still hasn’t fully recovered, today.
3. Japan’s a fiscal mess
Many economists worry that the U.S. debt will soon reach 100% of GDP, perhaps as soon as 2010. 100% is one of those magic economic numbers – not only is it nice and round, but at that level, interest payments become a crushing burden. It’s hard to afford anything beyond the servicing of the debt.
In Japan, government debt is over 200%. It will be around 225% by the end of next year. The central bank has long been paralyzed – with interest rates reduced to 0% many years ago, and every trick tried and failed already.
The government has cast about for some good response to the current crisis, and come up empty. That, in large part, is the reason Japan is now going through a political crisis.
4. Who’s the Leader?
Last week, Japan’s embattled Prime Minister, Taro Aso, received a stunning blow. His party, the LDP – the ruling party of Japan for the past 50 years, save a few months in the ‘90s – lost local Tokyo elections badly.
They’d held the majority in Tokyo for 40 years. No one expected this result – and it’s being viewed as a condemnation of Aso and his party.
Amid calls for his head from enemies and allies alike, the gaffe-prone Aso has dissolved the Japanese parliament and called for elections on August 30. Should he lose – and, with 20% approval ratings, he just might, despite the formidable strength of the LDP – Japan will see new leadership for the first time in nearly a decade. And, again, that brief interlude in the ‘90s hardly counts.
If there’s one thing the markets hate, it’s uncertainty. And this election is the most uncertain Japan has seen in a very long time.
Add everything together, and you’ve got a country that has a rough few months in front of it, if not years. My recommendation – short Japan through August. I recommend the Proshares Ultrashort MSCI Japan Index (NYSE: EWV), which moves at twice the inverse of the regular MSCI Japan index.
After the election, the green shoots and positive news may make opinion – especially if the DPJ carries the day and institutes a variety of social programs. I’d exit the position before then. But for the time being, a global recession, depressed sales, crushing debt, and political uncertainty should be enough to guarantee Japan’s indices suffer.
Ryan Cole
P.S. If you’d like to find out more on uncovering some of the best foreign investments around the world, take a look at the Oxford Club’s New Frontier Trader Service.
- The Japanese Economy: All The Reasons You Don’t Want To Invest In Japan Right Now
- Japan’s Historic Moment Creates Historic Confusion
- Investing in Japan: Two Ways to Play Its Stock Market Revival
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2 Responses to “Japan’s Darkest Days Lay Ahead”
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July 19th, 2009 at 6:58 am
It’s easy to understand the sorry prospects for Japan’s economy when you understand the relationship between population density and per capita consumption, and how an excessively dense population drives down per capita consumption and drives up unemployment and poverty. It’s this relationship that makes nations like Japan utterly dependent on manufacturing for export to sustain their bloated labor forces. Take away those exports and their economy will completely collapse, just as you’re predicting.
I am the author of a book titled “Five Short Blasts: A New Economic Theory Exposes The Fatal Flaw in Globalization and Its Consequences for America.” I think you may find this book to be very interesting because population density lies at the heart of this new economic theory. To make a long story short, as population density rises beyond some optimum level, per capita consumption of products begins to decline out of the need to conserve space. People who live in crowded conditions simply don’t have enough space to use and store many products. This declining per capita consumption, in the face of rising productivity (per capita output, which always rises), inevitably yields rising unemployment and poverty.
For most people who see never-ending population growth as a problem, their concerns are rooted in a concern for the environment. Economists, on the other hand, shrug off such concerns, claiming that man is ingenious enough to overcome any obstacles to population growth. Resources can be used more efficiently and recycled, pollution can be abated, and so on. Making matters worse, they can’t envision how an economy can remain healthy without further population growth. So our government and business leaders hold fast to their “pro growth” approach.
If you’re interested in learning more about this important new economic theory, I invite you to visit my web site at OpenWindowPublishingCo.com. There you can read the preface, join in the blog discussion and, of course, purchase the book if you like. (It’s also available at Amazon.com.)
Please forgive the somewhat “spammish” nature of the previous paragraph. I don’t know how else to inject this new perspective into the debate about overpopulation without drawing attention to the book that explains the theory.
Keep up your efforts to raise concern about our growing population problem.
Pete Murphy
Author, Five Short Blasts
Reply
August 2nd, 2009 at 12:50 am
However, unlike the U.S., most of Japan’s debt is domestically held. It is the U.S. that is at the mercy of its lenders and not Japan. However, both countries face the disadvantage of an aging population. This is why other Asian countries outside of Japan with their much more favorable demographics are ahead of the economic game with the exception of North Korea.
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