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Godzilla Will Come Out Of Tokyo Bay Before Japan Rebounds (EWJ, DFJ, DXJ, ITF, JSC, NKY, VPL)

February 2nd, 2012

Keith Fitz-Gerald: Let’s talk Japan (NYSEArca:EWJ). Every year some analyst comes out with a variation of the story that Japan is about to rebound.  Usually the argument goes something like this: Japanese  markets are impossibly cheap and the central bank will be there to prevent a catastrophe.

Or sometimes there is another variation of the Cinderella story.

Either way, don’t hold your breath.  Japan posted its first trade deficit since 1980 last year and the big trade surpluses needed to drive the Nikkei back to its glory days are over.

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At best, Japan is going to see balanced trade figures or a small surplus in the years ahead. It won’t be enough.

If you’re not familiar with what a trade deficit is, here’s what you need to know: Japan imported $32 billion worth of stuff more than it exported for the first time in 31 years.

Fighting the Demographic Tide

Critics say there are mitigating factors behind the figures and they’re right.

Against the backdrop of one of the world’s fastest aging  populations, one of the lowest birth rates on the planet, a renewed reliance on foreign energy, and a yen that is so expensive that Japanese corporations are offshoring production, it won’t be long before the country eventually plows through its savings.

So $32 billion is just the beginning…

In fact, we are more likely to see Godzilla walk out of  Tokyo Bay than we are to witness a return to Japan’s halcyon days.

Worse, I believe that within the next five years, Japan will long for the good old days when the trade deficit was merely $32 billion, instead of $100 billion, $200 billion or worse.

Not one of the things I’ve just mentioned – that the critics cite as  short-term influences -  are anything but continuations of much longer-term trends. Nearly all of them are  being driven by Japan’s declining population.

You may not know this, but Japan’s population is projected to shrink by 30% by 2060. That means the total population will go from 128 million people today to only 87 million people in less than 50 years.

That’s hard to imagine since Japan is one of the most densely populated countries on the planet.  But the effects are already visible.

In my neighborhood in Kyoto, for example, we see abandoned  houses that fall in on themselves after people die and there are no longer any other family members to live there. We see schools that are shut down in the region because there are no kids to attend them.

We’re also seeing companies shuttered because there are no markets for their products, including my wife’s family kimono business, which  closed after 300 years in existence.

Simply put, you just can’t grow a population or its stock markets without people.

Japan also has no immigration policy to speak of, so there is no means of replacing the “silvers,” or senior workers, who are leaving their productive years behind them.

By 2060 the number of people who are 65 or older is going to double. At the same time, the number of people in the workforce between 15 and 65 is going to shrink to less than 50% of the total population.

By 2050, there will be 75 retirees for every 100 workers. By comparison, in the United States in 2050 there will be about 32 retirees per 100 workers.

Nearly one in five Japanese is aged 65 or older...
Figure 1: Source: mtholyoke.edu

You’d think Japan could get “busy” and produce more children but even that’s problematic. The country has one of the lowest birthrates on the planet. Many young Japanese simply don’t want romance — let alone  children.In fact, many Japanese don’t even want sex.

As reported by CNBC, one AFP study reported that 36.1% of teenage boys between  the ages of 16 and 19 have no interest in sex. That study in 2010 reflected  results that were double the 17.5% reported only two years earlier. Girls are even worse, with more than 59% in the same age group reporting no interest.

Things are so bad according to one study I’ve seen, that at the current birth rate the last Japanese person will be born 953 years from  now.

Game Over For Japan?

Critics challenge this assumption, arguing that somehow Japan’s hyper-aged will reinvigorate the economy in an orgy of retirement spending and consumption.

That depends on generous pensions and an intact financial  system – neither of which Japan has at the moment.

Japan’s debt stands at 200% – 253% of GDP, depending on  which studies you read, and is headed in the wrong direction. In fact, it looks  like a ski jump that’s three times our own debt burden.

headed in the wrong direction Senior citizens I know are doing everything they can to hang onto their jobs for as long as they can.

As a result, there is literally nowhere for younger workers  to go… except into low value “arubaito” or part-time work with no benefits, no promotions and very little economic value to contribute to Japan’s recovery.

My nephew, for example, struggled for years in such a job before getting training and finding work as a mechanic for Mazda.

To be fair, Japanese citizens purchase approximately 95% of Japanese debt. That’s why the country has been able to hang on and has not had its own Greek holiday.

By contrast, we borrow about 50% of our money as a nation from overseas, and we’re dangerously close to our own version of Greece’s meltdown.

But as the number of retirees rises and the number of workers falls, the Japanese government is going to have challenges maintaining this internal funding capacity.

At some point – either because there are not enough debt buyers or rates rise too high – they’ll have to turn to external creditors and interest rates that could easily be double the 1.5% the Japanese government pays lenders now.

At that point, debt payments would consume more than half of all government revenue according to The Atlantic.

Devastating Decline And then it’s game over.

So what’s an investor to do? Well for one thing, I sure as  hell wouldn’t invest in Japan on anything other than an extremely short-term basis.

Despite the fact that trade deficit numbers may ping-pong back into positive territory in the months ahead, there’s no reversing the  current long-term trend.

The notion that the Nikkei is somehow undervalued is naïve  if you do not take the population and its effect on debt into account.

While it is true there may be short bursts of growth, there’s no ignoring the fact that the bellwether index is trading at 8,802.51, or 77% below the high it achieved in 1990 and 12% below where it started in 1984.

With very few exceptions, money invested in Japan is going to get trapped there.

That’s why, unless you’ve got money to burn, you can say ”sayonara” to Japan.

Related: WisdomTree Japan Small Cap Dividend (NYSEARCA:DFJ), WisdomTree Japan Hedged Equity (NYSEARCA:DXJ), iShares MSCI Japan (NYSEARCA:EWJ), iShares S&P/Topix Japan 150 (NYSEARCA:ITF), SPDR Russell MidCap Japan (NYSEARCA:JSC), MAXIS Nikkei 225 Index Fund (NYSEARCA:NKY), Vanguard MSCI Pacific ETF (NYSEARCA:VPL).

Written By Keith Fitz-Gerald From Money Morning

Keith Fitz-Gerald is the Chief Investment Strategist for Money Map Press, as well as Money Morning with over 500,000 daily readers in 30 countries. He is one of the  world’s leading experts on global investing, particularly when it comes  to Asia’s emergence as a global powerhouse. Fitz-Gerald’s specialized  investment research services, The Money Map Report and the New China Trader,  lead the way in financial analysis and investing recommendations for  the new economy. Fitz-Gerald is a former professional trade advisor and  licensed CTA who advised institutions and qualified individuals on  global futures trading and hedging. He is a Fellow of the Kenos Circle, a  think tank based in Vienna, Austria, dedicated to the identification of  economic and financial trends using the science of complexity. He’s  also a regular guest on Fox Business. Fitz-Gerald  splits his time between the United States and Japan with his wife and  two children and regularly travels the world in search of investment  opportunities others don’t yet see or understand.


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