The core to Japan and its future problems is embedded in its demographics.
In many developed countries, the average age of its population is rising. But nowhere is this happening as quick as in Japan. This was succinctly exemplified last May, when the Japanese diaper producer Unicharm said that soon they will be selling more adult diapers than regular diapers:
At Unicharm, said Takahara, who is also president, the adult diapers business is becoming increasingly important to the company.
“Domestic sales of diapers for the elderly are growing by double digits,” Takahara told reporters last month. “It’s an extremely important business in terms of both sales and profit margin.”
This story was largely ignored in May, but as hedge funds and banks started honing their sights on Japan this fall, the story resurfaced. It was Morgan Stanley that made many people, myself included, aware of the large demographic shift, in a presentation with the lovely title: “Shorting Japan is the trade of the decade. But which decade?”.
Other than a less than optimal demographic, there are three things you need to know about Japan’s economy; they have the worst looking balance sheet of any country (including Greece and Ireland), the country has been in deep financial trouble for a whole generation and somehow the economy has failed to blow up .
As I am writing this, Shinzo Abe has just won reelection. He first served only one year and is making his comeback on two issues: boosting the economy and nuclear energy.
When Abe left the position as prime minister, due to “Crippling Diarrhea“, he was known as the worst prime minister since 1994 for Japanese bonds. Based on this, and the fact that he publically said he wants to make sure the Yen weakens, it could be a blessing for the Japanese export sector.
That’s probably the reason why the smartest investors in the world are betting heavly against Japan. Both the bonds and the Yen. But that could be great news for Japanese exporters.
Albeit Abe is walking a tight rope, since even a 2 percentage point increase in interest rates, could be enough to crush the Japanese economy. In theory.
The final thing you have to consider, is the way Japanese debt is structured. On the face of it, the country has a debt 195% of their GBP. Meaning the economy is almost half as small as the debt. But who are these creditors? 3 out of every 4 Yen owed, is to Japanese banks, individuals and institutions. That means that Japan has control over its creditors, which gives them significant leverage. (In contrast we can look at Greece, which has almost all of its creditors abroad and no control over its own currency).
Secondly if Abe manages to do what he has pledged to do, to destroy the value of the Yen through “unlimited easing”, the Japanese export sector could be in line for the biggest boost in history. If the value of the Yen drops 20%, that money hits Japanese companies straight on the bottom line. Instant profit.
Now finally we have to consider that investors have been betting against the Yen about once a year for the last four years. Massive losses have built up so far.
But this time, it could be different.