Japan: the next global time bomb? (rapidly aging population and deepening financial struggles)

Fortune ^ | 09/28/2010 | Darius Dale

[SeekAndFind]

A rapidly aging population and the government's deepening financial struggles make Japan a potential powder keg for international investments.

We try to avoid hyperbole as much as possible at Hedgeye, the research firm where I work as analyst. But after researching Japanese demographics and pension obligations, we have to say that in our opinion, they present one of the most dangerous potential risks to global investing over the next 10-20 years.

For background, let's explain Japan's demographic headwinds, which often get bandied about without much supporting data. For starters, with 22.7% of its population above the age of 65 (as of 2009), Japan has the world's oldest population. That figure will continue to grow; Japanese government projections raise the ratio to 29.2% by 2020 and 39.6% by 2050.

Currently, the ratio of retirees to working-age Japanese is 35.5%. In just 10 years time, retirees will make up 48%. In a society notorious for luxurious pension packages, going from a 3-to-1 to almost a 2-to-1 ratio in contributors-to-retirees in a matter of just a decade is frightening to say the least. And it doesn't get any better: By 2050, the ratio of retirees to working-age population will reach 76.4%, according to projections from Japan's Ministry of Health, Labour and Welfare.

The obvious conclusion here is that there will be more and more people in line for pension payouts and fewer and fewer people to fund them. The funding outlook looks even more bearish when one considers that 56% of Japanese workers rely on financial support from their parents or other sources to cover their living expenses (Japanese Labor Ministry). In other words, the people Japan is counting on most to fund ever-increasing pension liabilities are being supported by the very payouts they are supposed to be covering. This is not good.

[WAW]

I think the Chinese housing bubble may be the next one...

But there are so many contestants on “What will cause the next financial crisis?”, its hard to pick a winner.

[Vigilanteman]

Japan also has the healthiest 65 and older population in the world with the heftiest savings rate and best insured. There is no reason that a substantial portion of this population cannot work, at least part time.

Many already do and more could.

Ditto for our own boomers, except for the savings rate.

[ClearCase_guy]

It seems overwhelmingly clear to me that the 20th century was a century of government growth and intervention. Sure, it's easy to spot in Hitler, Mussolini and Stalin. But clearly Wilson, FDR and LBJ were playing the same game -- but perhaps playing more gently. England, France, Japan and countless other nations all looked to the government to solve every problem, create growth, create retirement plans, blah, blah, blah.

It's all coming apart.

I'm not overly optimistic, but as the 21st century gets underway, the crucial lesson to learn (as people suffer and die) is that less government is better. Stupid people look to the government to make things better. Smart people realize that government just makes things worse.

Government guards you from the bigger bully across the street -- that is appropriate. But whenever government turns its attention to the people on this side of the street, you've got trouble.

[bert]

In the course of history, and history takes a long time, the 20th century will be remembered because of the deaths of monarchies and the tyranny of nobility.

The American and French revolutions were the outliers, the precursors. The deaths of monarchs reached epidemic as the two world wars raged and peoples learned and sought adjustment to new kingless and always unknown governance.

Just as the American revolution was an outlier, being first, the Arab/Islam revolution is last and outlier. The current war with radical reactionaries is an attempt to make Islam superior to the remaining Islamic monarchies and to gain control of the territory and the people.

The current era will be one of settling down and adjustment and rejection of failed postmonarchial experiments.

The socialist model on a grand scale has been shown to be dysfunctional. It has and is being rejected. Totalitarian subjugation and corruption of the various revolutions have also failed. Once the tyrants are overcome, the people gain a hold that becomes stronger.