A financial tsunami is looming over Japan’s horizon. If it is going to strike, as increasingly looks likely, then it is best to happen before the aging nation grays much further. Wait longer and the damage to youth and future generations only escalates. An early crisis, while regrettable, would give the nation cause to self-reflect. It might even allow the Prime Minister to make the difficult reforms.
At issue is whether the government can implement Abe’s revised growth strategy fast enough. Vested interests have caused the Administration to delay, dilute or ditch proposed reforms in the past. Others, like the key issues of labor mobility and social entitlements, have barely been touched. Yet ‘Abenomics’ will fail to prevent a crisis if the recent installment of wide-ranging measures are not implemented by the time the storm hits.
Everybody ‘knows’ a crisis is looming due to Japan’s expanding population of elderly as it collides with a rapidly declining workforce. Everybody ‘knows’ the ratio of working-age adults to the elderly will have halved to 1.5 by 2040. And everybody ‘knows’ there will be too few young taxpayers to pay for their elders’ pensions and health-care costs, which threaten to ‘bankrupt’ Japan’s heavily indebted government.
Until the storm hits, however, that understanding remains largely an intellectual one. People underestimate the speed and the enormity of the demographic shifts taking place. The result is that actual reforms will continue to be kept in check by strong vested interests.
Consider, for instance, elderly Japanese over 60 years old which hold most of Japan’s power and wealth. 68.2% of Japanese household net financial assets are owned by the elderly, while those below the age of 40 own only 2.5%. The elderly also represent 44% of the voting public, versus 13% voting share held by those in their 20s. The elderly and other special interest groups will likely block reform measures at every twist and turn, leading to an inevitable crisis.
Ironically, Japan is in better shape today to absorb a direct financial hit than most people realize. They read the grim news and mistakenly believe the country is a basket case. That isn’t true.
The nation and its government are different. Central government is burdened with $10 trillion of debt equivalent to 201% of GDP. Japan’s households, on the other hand, own $15 trillion of net financial assets (at book value) of which 25% is net borrowings. They also own land and homes worth another $10 trillion. So households are not nearly in as bad shape as the government.
Further, Japan’s infrastructure is in better condition than that of other developed nations. Most buildings are earthquake proof. Trains run on time. The Japanese people are hardworking and well educated. No culture is as socially cohesive. Japan is a rich nation when viewed this way.
Time is running out. Householders, once savers, are turning into net spenders. The nation’s current account, equal to the sum of Japan’s exports less its imports plus income earned on overseas assets, is also turning negative. Future generations are being burdened with ever more national debt.
When the country can most afford it, a smaller crisis today would provide a needed wake-up call in much the same way that 3/11 caused the nation to reflect on the wisdom of building nuclear power plants on tsunami prone coastlines and atop geologic faults. A financial tsunami, as regrettable as it may be, might even trigger the very reforms needed to get the country back on a course of sustainable growth.