What Japan Can Teach Us About Achieving Economic Growth Despite Rapidly Changing Demographics

The prevailing opinion that Japan’s economic performance since the turn of the century reflects a lack of dynamism is often supported by the paltry 15 percent rise in the country’s real output. While most economists correctly view real output as a key metric concerning economic performance, it can be somewhat misleading if relevant demographic trends are not taken into account as well.

With Japan’s real output checking in at an average of just 1 percent per year over a period of 15 years, it perhaps should come as no surprise that there is substantial disparity between opinion and reality: Accounting for Japan’s demographic factors reveals an economy that is performing exceptionally well under circumstances that are far from optimal.

Instead of solely relying on real output to measure Japan’s economic performance, economists benefit from a much clearer picture by looking at relevant demographic trends and focusing on the growth rate per working-age person. At two percent, the growth rate among Japan’s working-age population rated much better than the United States and Europe, with the US checking in at just one percent in the growth rate per working-age person.

Looking at it in this way, it becomes evident that the American economy’s 35 percent growth since 2000 was driven at least in part by demographic trends that saw substantial growth in the working-age population. It also reveals that these advantageous demographic trends were not leveraged in the most optimal fashion. Given Japan’s economic performance in the face of suboptimal demographics, it is clear that there is much to be gained from a careful study of Japan’s economic approach.

One of the principal factors enabling Japan to achieve growth without inflation lies in its ability to deal with substantial public debt through internal financing. With a countrywide savings surplus, Japan has been able to handle a debt-to-GDP ratio greater than 150 percent. Of course, this is not without its downsides, particularly since a rising debt-to-GDP ratio poses the risk of quickly growing unmanageable in a low-growth economy with large fiscal deficits.

The potential downside of the Japanese economic model might be mitigated through a strategy employed in Europe, where a deficit cap of three percent of GDP is mandated by the Stability and Growth Pact. Economic analyses seem to indicate that the deficit cap has succeeded in ensuring the debt-to-GDP ratio remains stable and does not go beyond the point of control.

Los Angeles Real Estate Market Continues Record-Breaking Surge

The Southern California real estate market is stronger than ever, so much so that the ongoing surge pushed median home prices in the region to $505,000. It has been more than 10 years since the last time the Southern California real estate market achieved such lofty heights, so much so that the previous high actually predate the recession. Fortunately, the economic conditions that crashed the market — and made the median home prices of a decade ago so unsustainable — do not exist today.

Several of the geographic areas comprising the Southern California real estate market are exceptionally healthy, with Los Angeles County and Orange County exceeding the previous peak in median home price by significant margins. In Los Angeles, the median home price of $575,000 represented an increase of 9.5 percent over the previous year and easily outperformed the pre-recession mark of $550,000. Orange County posted an 11 percent increase in the median home price with an average of $710,000, well over the $645,000 the area boasted back in 2007.

With a greater level of economic stability on the both the local and national level, there is far greater confidence in real estate markets across the United States. In 2007, the increase in home prices was a product of the risky lending practices that ultimately sent the economy into a tailspin. More than a decade later, rising home prices can be attributed to a stronger, more sustainable economy committed to learning from and preventing the disastrous mistakes made in the past.

Of course, the rise in the median home price in Southern California has created several complications that must be addressed sooner rather than later. When costs rise, accessibility to affordable housing is sure to become an issue. Given the short supply of homes — not to mention the influx of Californians displaced by the wildfires in the northern part of the state — legislators are already taking action to ensure the availability of affordable housing throughout the Southern California region.

There is also some concern that the strength of the real estate market is discouraging out-of-state workers from accepting job offers that require relocation, and many have noted that job growth has indeed slowed statewide. With the goal of attracting new workers while also encouraging current residents to remain, lawmakers have worked quickly to pass several bills addressing the housing shortage, particularly with regard to the shortage of affordable housing options.

Given the present rate of state and national economic growth, most economists agree that the solutions enacted by state lawmakers should not impede the health of the real estate market in Southern California. As a result, the majority of analysts expect that the Los Angeles region will again be one of the nation’s top real estate investment and development performers in 2018.

Real Estate Investment and Development: “Secondary” Cities Offering First-Rate Growth Potential in 2018

Shrewd real estate investors are looking to 2018 as a year in which several so-called “secondary” cities feature minimal risk as well as exceptional return potential, an ideal combination in any investment opportunity.

While major cities across the United States — such as New York on the East Coast and San Francisco on the West Coast — continue to post record numbers while drawing increased interest from international and domestic investors alike, there is ample evidence suggesting investments in a secondary city will yield a greater return along with minimal risk.

As secondary cities continue to attract new residents with booming job markets and exceptional living costs, expert analyses continue to identify cities that top out around 3 million total residents as featuring the conditions necessary for a robust return on an investment in real estate. These cities appeal to a broad section of the population, particularly those seeking a tangible sense of community as well as all the benefits of big-city living.

In rankings of the best real estate investment markets nationwide, major markets like Los Angeles and Boston are now being joined by secondary cities such as Austin and Salt Lake City. Of course, the performance of any real estate investment is conditional on a wide range of factors that go well beyond population density.

When it comes to a real estate investment in a secondary city, the success of the investment hinges on several key issues: cost of living and quality of life; indicators of economic strength such as job creation and growth; a quality education system; and sound local infrastructure. As it stands now, a growing number of secondary cities feature the conditions necessary to yield a substantial return on investment.

In addition to cities like Austin and Salt Lake City, several cities from the Carolinas to the Pacific Northwest are poised to perform exceptionally well for real estate investors. In North Carolina, investors are expected to yield substantial returns on properties in Charlotte and Raleigh/Durham. Farther south, Charleston, South Carolina, and Orlando, Florida, provide the kind of opportunities shrewd investors typically seek.

In Texas, the Dallas-Forth Worth area joins Austin among secondary cities expected to perform well for real estate investors, but it is Seattle that has piqued the greatest amount of interest from real estate experts. In fact, in an annual survey published in Emerging Trends in Real Estate, it was Seattle that earned the top ranking for providing the best prospects for investment and development in the year that follows.

An Objective Look at the Potential Impact of Incremental Changes Planned by Federal Reserve

Circumstances in which the Federal Reserve announces a planned increase in short-term interest rates along with the reduction of mortgage-backed securities and Treasury bonds typically serve as an indication of a tighter approach to monetary policy. Even so, the recent announcement from Fed chairwoman Janet Yellen –- which featured the usual conditions associated with a tightening of the monetary policy –- outlined changes so incremental that the typical policy classification cannot be credibly applied in this instance.

Approximately nine years of monetary policy marked by the process of quantitative easing enabled the lower interest rates aligned with a period of sustained economic expansion across the globe. This period of expansion, of course, was preceded by a financial crisis that emerged out of the housing bubble and a relatively loose monetary policy. Arguments over the influence of the monetary policy tend to vary rather widely, but there are many who firmly believe that an earlier tightening of the monetary policy would have discouraged the borrowing that ultimately led to the housing bubble.

Nearly a decade later, those same arguments are being made in favor of a tightened monetary policy intended to ensure sustained economic growth rather than another downturn. Since many economic opinions closely align with one’s place on the political spectrum — which does not mean that the opinion is thus invalid or based on anything but sound reasoning — it’s important to remember the importance of objective economic analyses that take a wide range of issues into account to determine whether a particular action concerning the monetary policy will ultimately achieve its intended outcome.

The current state of the economy features businesses and households with fairly significant debt. An increase in the short-term interest rate, however incremental, might have a far greater impact on borrowers nationwide. With such widespread debt among American businesses and households, an interest rate hike could leave the Federal Reserve relatively helpless if the economy is suddenly dealing with another downturn. Legislators would likewise encounter difficulties in attempting to mitigate the consequences of another recession.

This is not to say that the Fed’s decision to change course — however slowly the change occurs — toward a tightened monetary policy will trigger a downturn; instead, it is important that policymakers take actions based on well-reasoned analyses that take into account the full breadth of factors that influence economic strength.

Thankfully, a reasoned approach to monetary policy is one of the areas in which ideology does not prevail over logic and reason. In fact, both The Roosevelt Institute and The National Review, bastions of liberal and conservative thought, have expressed a clear preference for a looser approach to monetary policy.

Even several prominent far-right politicians (including Ted Cruz, for instance) have gone on the record to say that the Fed’s recent approach, despite being regarded as loose by the majority of economists, inhibited economic growth in the aftermath of the recession because — in almost diametric opposition to conservative orthodoxy – the Fed’s monetary policy was not loose enough.

Keen observers of the decisions and debates surrounding economic policymaking should be heartened by the fact that the mistakes of the past are being heeded as the Fed takes steps toward tightening the monetary policy. That fact alone bodes well for a sustained period of economic growth.