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.

Strong Job Creation Numbers Inspiring Young Workers to Enter Housing Market for First Time

For an entire generation of young people, growing up during a time of economic uncertainty has had an undeniable impact on way they approach all manner of financial decisions. Members of this generation have exercised great caution while adopting a risk-averse financial philosophy, and this philosophy has in turn limited their willingness to consider entering the housing market for the first time.

The limited interest among members of this youthful demographic has had a measurable effect on the real estate industry, but it appears that the strength of current economic conditions might finally be enough to convince these young people to test the housing market. It appears that the recent reports of strong job creation numbers — along with a wealth of job openings representing a record high — have inspired a sense of confidence among the group of people least likely to act hastily based on a report of the most recently available economic statistics.

Of course, this does not mean that this youthful generation has not faced difficulties upon entering the housing market for the first time, particularly since the inventory of single-family homes available for purchase is currently at an all-time low. Combined with the fact that apartment vacancies presently stand at just under four percent (3.8 percent, to be precise), it is clear that the sudden increase in demand cannot be met given the currently available supply even when one considers that 371,000 new units are expected for delivery in the next 12 months — not to mention the fact that new apartment construction has never been higher in the past 30 years.

It is not only the residential real estate market that is experiencing the influence of the continued return of strong economic indicators, as the commercial real estate market is also dealing with a level of demand that cannot be met by the current pace of new commercial real estate construction.

This is especially true as it relates to financial services employment as well as professional and business services employment, all of which have outperformed the labor market as a whole. Since companies within these fast-growing categories have primarily targeted recent college graduates for recruitment to new, office-based positions, the demand for new commercial real estate has increased at a rapid rate greatly exceeding the current pace of commercial sector construction.

With the expectation that 2 million new jobs will be added by the close of 2017, there is some concern that a large percentage of these positions will nonetheless go unfilled due to a shortage of skilled workers available for what is now a total of 6 million job openings currently available in the United States. Keeping these and other economic figures in mind, the Fed has continued to favor a moderate monetary policy in an economy lacking any sign that it may be prone to overheating.

From ZIRP to NIRP Part III: How Low Interest Rates Devastate Retirees

Whereas central banks’ experiments with historically low interest rates have had mixed results on economic growth at best, they have also had devastating effects on American retirees’ nest eggs. As discussed in earlier segments of this series, rock-bottom (or even lower) interest rates and aggressive quantitative easing have done little to spur robust and sustainable economic growth in Japan and the US. Instead, they encourage risky investments and hurt savers and conservative investors.

Another negative outcome of such policies is that retirees on fixed incomes who are reliant on savings and interest are hurt by an extended period of miniscule returns. This is not an insignificant portion of the population. There are now more than 45 million Americans age 65 and older, representing over 13% of the population– a higher portion than at any prior point in US history. While nearly 20% of this group is currently employed due to the effect of the recession on their meager retirement savings, by some counts, an average of 10,000 boomers retire each day.

Once they transition into retirement, and shift from saving to spending, retirees normally seek to de-risk their portfolio. They typically turn to fixed-income products and move their retirement money into assets like certificates of deposit (CDs), low risk treasury bonds, and annuities. Unfortunately for this group, interest rates are extremely low. Whereas ten years ago, retirees could have relied on a yield on 10-year Treasury bonds that exceeded 5%, they are lucky to get 2% today. Rates on CDs, money market accounts, and savings also remain low. While some are sticking with their meager 1-2% returns, others have been encouraged to turn to higher risk investments in the stock market and real estate, pushing them to lofty valuations.

A 2015 report from Fidelity found that 35% of those between ages 51 and 69 are overexposed to the stock market. Moreover, 10% of this group have their entire 401(k) assets invested in stocks, meaning any sort of stock market volatility to could devastate them. Conversely, economists warn that if this generation begins to transition and de-risk their portfolios, the stock market could experience a sharp drop.






America’s Birthrate Declines in 2015

Recent data culled by the Centers for Disease Control and Prevention showed an unexpected drop in births in the US in 2015, which fell by 1% from 2014, contrary to the forecasts of demographic analysts. Moreover, the US fertility rate in the first quarter of 2016 fell to 59.8 births per 1,000 women aged 15-44, tying 2013 figures for the lowest fertility rate on record. The figure translates to less than six births for every 100 women, prompting talk that America is currently mired in a baby bust.

America’s current general birth rate is 13.42 births per 1,000 citizens, according to the CIA World Factbook, a figure which is down 10% from 2007.  For comparison, Mexico’s birth rate is 42% higher, or 19.02 births for every 1,000 citizens.

Closer examination of the figures reveals a dramatic change in the ages that women have children today and provide insight into the declining birthrate. There has been a precipitous drop in teenage pregnancies and pregnancies among women in their 20s, both of which have played a large role in driving down the US birthrate. To put it differently, millennials, who have not been having children, are largely responsible for the declining numbers.

A 2015 study by the Urban Institute found that the birth rate for women ages 20-29 fell by 15% between 2007 and 2012. “If these low birth rates to women in their twenties continue, the U.S. might eventually face the type of generational imbalance that currently characterizes Japan and some European countries, but it is too early to predict or worry about that eventuality,” the report noted.

Social changes have pushed women to bear fewer children and put off pregnancy until later in life. Moreover, the economic pressures exerted by the 2008 recession have likely played the biggest role in disincentivizing childbearing among millennial women. While abortion may seem like a likely culprit for this demographic shift, abortion rates have actually declined since the 1980s, according to The Wall Street Journal.

It will soon become apparent whether millennial women will eventually have more children. The most common age in the US is currently 24 or 25, according to The Wall Street Journal, which means there is a sizeable portion of millennials who may decide to become parents in a few short years.






Rate of New Business Formation in the U.S. Plummets

A new report by Michelle Meyer, an economist for Bank of America Merrill Lynch, argues that the rate of new business formation in the United States has plummeted precipitously, directly undermining the notion that the country is in the midst of a “startup boom” and boding ill for future economic growth prospects.

Meyer’s research, which is discussed in a Business Insider report, notes that both the formation of firms (e.g. McDonald’s Inc.) and individual establishments (e.g. the McDonald’s franchise down the block) have dipped since the 2008 financial recession and stubbornly remain low. This is troubling because new businesses tend to hire more people more quickly and enjoy higher productivity rates, compared to established ones. According to her data, the rate at which firms and establishments enter the market currently hovers between 8% and 9%, which is well below the 10%+ pre-recession levels.

Meyer cites a Federal Reserve Board research paper which found that “a one-standard deviation shock to the number of start-ups led to an increase of real GDP culminating to 1-1.5% and lasting 10 years or longer. This suggests a notable and lasting impact on the economy from weak rate of business entry over the past decade.”

She suggests four reasons for the relatively moribund state of business creation in the US. Tighter credit conditions have made it more difficult to start up new businesses by choking off the necessary supply of liquidity and loans. Second, the politically and economically uncertain climate have exerted a chilling effect, discouraging small business formation. This view is affirmed by research from Harvard Business School, which found that “political dysfunction” is hindering U.S. business competitiveness.

Third, contrary to popular belief, the technological disruptions of the late aughts and the shift away from manufacturing have made it even more difficult to start a small business, as businesses migrate away from brick-and-mortar establishments and into the cloud. Finally, Meyer cites demography as another contributing factor, blaming an aging population for dwindling entrepreneurship.