Central bank veterans are lining up to highlight the Achilles’ heel of Prime Minister Shinzo Abe’s economic revival plan: the world’s fastest aging society.
All five ex-Bank of Japan officials in a Bloomberg News survey said any gains in government bond yields will be contained over the next two years, with four of them seeing little chance that the BOJ will achieve its 2 percent inflation target. People 65 or older accounted for 22.1 percent of Japan’s total population in 2007-2011, the highest global proportion, according to Bloomberg Rankings.
Jean-Claude Trichet, the former European Central Bank president, said on March 20 that demographics are a “big, big, big problem” that Japan needs to address. Masaaki Shirakawa, who stepped down as BOJ governor in March, has voiced a similar view, saying the nation’s slow response to the issue saps its growth potential and helps perpetuate deflation.
“What creates Japan’s deflation is the aging of society,” said Hideo Kumano, the chief economist at Dai-ichi Life Research Institute Inc. in Tokyo. “Robust economic growth and business opportunities that provide future income are needed to end deflation. Even if the central bank raises the flag of inflation, whether people will follow it is a different matter.”
Kumano, a 10-year veteran at the BOJ, sees lower Japanese government bonds yield in the next two years. A separate poll of 16 economists shows the yield on the benchmark 10-year note may rise to 0.93 percent by September 2014, still the lowest among developed nations, from 0.59 percent today.
Japan has suffered through 15 years of persistent falling prices, and saw China overtake it as the world’s second-biggest economy in 2010. The nation’s population will probably fall below 100 million in 2048 for the first time since 1966 from 127.2 million now, based on estimates from the National Institute of Population and Social Security Research.
“The BOJ’s bond buying can’t resolve the shrinking population or aging of society,” said Takahiro Sekido, a strategist in Tokyo at the Bank of Tokyo-Mitsubishi UFJ Ltd. and a former BOJ official. “Because Japan’s productivity has only marginal room to rise, it’s necessary to prevent a decrease in population or to encourage more participation of female workers for economic growth.”
Japan’s ratio of women to men in the labor force was 0.74 in 2010, ranking 87th globally and compared with the U.S.’s 0.86, the latest Global Competitiveness Report from the World Economic Forum shows. Abe said on April 19 his growth strategy will try to help women, the least tapped human resource.
Elsewhere in Japan’s credit markets, Central Nippon Expressway Co. hired banks for a sale of 70 billion yen ($720 million) of five-year bonds this month, according to a statement yesterday from Mitsubishi UFJ Morgan Stanley Securities Co., which is managing the deal with four other firms.
The Markit iTraxx Japan index, composed of credit-default swaps for 50 companies, fell to 83.5 basis points yesterday, the least since June 2008, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market. A drop in the gauge signals improving perceptions of creditworthiness. A basis point is 0.01 percentage point.
A Ministry of Finance auction of 2.2 trillion yen of 10-year bonds with a 0.6 percent coupon today attracted bids valued at 3.71 times the amount available, the highest ratio since December, according to the ministry’s data.
While the yen touched 99.95 per dollar last month, the weakest in four years, its depreciation has faltered. It traded at 97.28 per dollar as of 2:15 p.m. in Tokyo. The currency fell in April after BOJ Governor Haruhiko Kuroda’s board unveiled a plan on April 4 to double the monetary base in two years through increased buying of government bonds and stock funds.
The Topix index of Japanese shares has climbed 57 percent since Abe called for “unlimited” monetary stimulus on Nov. 15, and a 17 percent drop in the yen improved the earnings prospects for domestic exporters.
A survey of 4,000 voters by the BOJ showed on April 1 that 74 percent of respondents expect consumer prices to rise in the coming 12 months, up from 53 percent in a December poll.
The world’s third-largest economy will probably grow at least 2.8 percent every quarter through the end of 2013, according to the median estimate of economists by Bloomberg. Companies that were short of staff outnumbered those that had enough workers for the first time since September 2008, the BOJ’s quarterly Tankan survey released April 1 showed.
“If we assume Japan’s economic structure remains unchanged, the 2 percent inflation target is very difficult to meet,” said Junko Nishioka, the chief economist in Tokyo at Royal Bank of Scotland Group Plc and a former official at the central bank. “But, if the BOJ’s monetary policy -- intended to influence expectations -- leads to higher asset prices and stimulates consumption, people can drastically change their views that the target is unachievable.”
Japan had a baby boom between 1967 to 1973 and this rising wave of 40- to 46-year-olds are the prime purchasers of equities and large houses, said David Munro, Chief Executive Officer of Volatility Research & Trading Ltd., a Singapore-based company that advises hedge funds and companies on risk management, derivatives and demographics. This impact will only continue until 2016, he said.
“It makes sense for Kuroda to try to catalyze this group into non-JGB investments via the inflation threat,” Munro said. “His problem will be that inflation is highly correlated to the 16- to 28-year-old demographic, which continues to fall in Japan. So while he may engineer a switch from safety to risk, he is unlikely to have much impact on inflation other than from the effect of a weak currency, which will be one-off.”
Shirakawa said in February that the aging society is sometimes “misunderstood” to be hurting Japan’s economy, when the real issue is that the economy and society haven’t caught up with the demographic changes. Medical and nursing service providers may become one of the most promising domestic employers as companies expand overseas, he said.
“Even if children increase, the overall structure of Japan’s population won’t change immediately but it will take years,” said Maiko Noguchi, who worked at the BOJ for five years before joining Daiwa Securities Co. as a Tokyo-based senior economist. “What’s important is that businesses move to stimulate demand in a market with such demographics.”
Japan has so far failed to buttress its economy with immigration. Foreigners accounted for 1.7 percent of the total population in 2010, the lowest among developed nations, according to the latest data from the Organization for Economic Cooperation and Development. In the U.S., 13 percent of the population are immigrants.
Elderly-care costs will more than double by 2026 to 19.8 trillion yen a year, according to estimates from the health ministry, or almost equivalent to Ireland’ gross domestic product in dollar terms. Employees in medical, health care and welfare industries accounted for 12 percent of the workforce in March, up from 7.9 percent 10 years ago, figures from the statistics bureau show.
In contrast, workers in manufacturing industries made up 17 percent of the total, compared with 19 percent in 2003.
“One of the reason for Japan’s deflation is manufacturers’ shift overseas, and the service industry that should provide employment has very low productivity,” said Masaaki Kanno, the chief Japan economist in Tokyo at JPMorgan Chase & Co. and an ex-central bank official. “Unless the government embarks on structural reform, Japan’s potential growth rate will fall to zero as the labor force continues to decrease.”