Three Hidden Opportunities in Japan’s Shocking Demographic Decline

Keith Fitz-Gerald Sep 21, 2016
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[Kyoto, Japan] – Most investors are at least passingly familiar with the fact that Japan’s demographics are the worst on the planet because the country is “aging” so fast.

What they’re missing is just how massive an opportunity that is for the right investments.

And that’s what we’re going to talk about today, including three specifics that will get you started.

What a “Celibacy Syndrome” Has Done to Japan

I’ve been coming to Japan for nearly 30 years and living here part time every year for the past 20 as a father, husband, and businessman.

It’s one thing to talk about the graying of Japan like we do so frequently in the West – meaning how rapidly the population is aging – and entirely another to see it up close.

Every time I roll off the plane I’m simply stunned by how striking the demographics changes taking place here really are.

…Nearly 900 towns and villages will be extinct by 2040.

…Japan’s population growth is so low that the total number of people living here will fall by 35% to only 83 million by 2100 – only 84 years from now.

…The birth rate is so low that the last Japanese citizen may be born in less than 1,000 years.

The airport, bus stations, super markets, it doesn’t really matter… everywhere you looks you’re surrounded by an elderly population, some 33% of which is over the age of 60.

Children – especially infants – are becoming an increasingly rare sight if you’re not near a shopping center or school yard. The rate of decline is so stark that at this pace, Japan will have one child to celebrate Children’s Day on May 5, 3011, according to Tohoku University Economics Professor, Hiroshi Yoshida.

Take a spin into the countryside like I do frequently on my motorcycles, and the problem is even more graphic.

More than 8 million of the nation’s 60 million homes are abandoned, according to the Internal Affairs and Communications Ministry. Schools have closed, once-fertile rice fields lay fallow, and there are no public services.

Entire communities are doing anything they can to attract people, however desperate that may seem.

A few years back, for example, Mishima Village in Kyushu decided to give away free cows to attract young farmers… and there was only one taker. New rice, free schooling, free medical care… these are but a few of the gambits intended to attract more people.

As you might imagine, the economic impact is extreme.

A reduced population means smaller tax receipts which, in turn, mean fewer and more expensive public services, if they exist at all. Many of the small towns I ride through remind me of Detroit, minus the crime, as hard as that is to imagine.

The situation will not change any time soon.

A new study provides startlingly graphic evidence as to why… very few people are getting “busy” – and yes, I mean exactly what you think I mean: they’re not having sex.

According to a new Japanese population study from the National Institute of Population and Social Security Research, 70% of young men between the age of 18 and 34 don’t have a girlfriend/partner, nor did 60% of women the same age.

And here’s the part that really cuts to the chase… more than 40% of those same young men and women aged 18-34 have no sexual experience whatsoever. And the figure is going UP.

Over half of the survey’s respondents say they have no chance of meeting the right partner. Less than 10% of young men want their future partner – if they actually do meet one – to be a housewife or mother. I was unable to find statistics on same sex couples, but cannot imagine the numbers are much different.

These numbers really hit home around the dinner table. I’ve got several nieces and nephews who are part of the generation we’re talking about. Not only are they struggling to have any sort of relationship, but they’ve moved home, too, further compounding the issue.

Barring some very graphic changes, demographic disaster is inevitable.

  • Consumer spending is declining and will continue to decline for as long as demographics do.
  • Construction spending, once the domain of large public works projects used to compensate for earlier periods of economic weakness, will decline because there are no workers even though there is money.
  • Political upheaval is inevitable as older people shift to more socialist policies intended to preserve what they have. This is already limiting innovation and commercialization resources, and will continue to do so.
  • More stimulus efforts, a la Abenomics, will not work because aging populations are not as interest rate sensitive as younger people. Financial velocity will slow because older people tend to be creditors, not debtors – a lesson our Fed and the ECB would be wise to learn.

Three Profit Plays as Japan Bends to Demographic Reality

As bad as all this sounds, there’s always opportunity in chaos.

In fact, the demographics changes we are talking about are one of the Six Unstoppable Trends we follow closely here at Total Wealth because of their potential to create huge investment profits.

First, a weaker yen is inevitable and politically desirable as the problem accelerates.

My favorite way to play that is the ProShares UltraShort Yen (NYSEArca:YCS), which appreciates as the yen drops versus other major currencies. Of course, it’ll be a bumpy ride given the world’s propensity to run to the yen as a safety play just as they run to the U.S. dollar, but that does not diminish the opportunity whatsoever.

Second, Japan will be able to maintain a population of 100 million – a critical government threshold – only by accepting at least 200,000 immigrants a year. To grow, I think the figure is double that. Either way, doing so will involve changing an underlying current of racism and bias that lurks just beneath the surface here.

In the old days this kind of change was handled through an “international contribution” program that began in 1993, as a way to borrow foreign knowledge from highly skilled workers. The idea was they’d come, get their work done and go home.

Now though, the key is keeping them… starting with Chinese immigrants, who make up nearly 40% of registered foreign workers now in Japan – a figure that catches even most Japanese by surprise. They bring their families with them, and have higher birth rates, too.

My favorite way to play this is by investing in a company like Alibaba Group Holding Ltd. (NYSE:BABA), which operates as an online and mobile commerce company. As more and more Chinese workers move into Japan they’re going to pine for creature comforts from home – but most Japanese retailers will be slow (or reluctant) to stock specific China-centric items on their shelves. And that opens the door for Alibaba to do so.

And, finally, let’s talk robotics.

There’s a belief here that robotics are the answer for deteriorating demographics, so companies are racing to develop technology as a means to compensate for an aging population of workers and caregivers alike.

In fact, Prime Minister Abe has shown intense interest in robotics, repeatedly signaling his desire to help the industry thrive. Not for nothing has he called for a 2020 “robot Olympics” in Japan, and also for a special task force to help triple the industry to 2.4 trillion yen over the next few years.

Most investors are falling all over themselves in a rush to figure out which robot maker will come out on top and, as usual, they’re going to miss the mark.

The real opportunity is in a company like Softbank Group Corp. (SFTBY), which is creating a portfolio of Asia’s most important (and potentially most valuable) e-commerce companies – all of which will link the robotics to the population’s needs and collect a healthy chunk of money for doing so.

The company saw a 12.9% year-over-year bump in net income from continuing operations last quarter and has had strong growth for several years as it makes ready for the next leg up.

Now where did I put my reading glasses?

Even I’m getting older.

Until next time,

Keith

 

10 Responses to Three Hidden Opportunities in Japan’s Shocking Demographic Decline

  1. R. J. says:

    The Japanese, once the most homogeneous culture on the planet, are now like soldiers of the Imperial Japanese Army who continue to fight a lost war.

    The Japanese government already has the highest debt load in the world, at 230% of GDP. And the BoJ continues to buy stocks and bonds.

    It would seem the entire economy and government is deficit funded.

    Zimbabwe or Argentina, anyone?

    What a way to ruin an economy, by “monetizing” debt.

    Perhaps, just the path Hillary will continue.

    • Keith says:

      Hello RJ.

      Your points are well made and taken, as always. Respectfully, though, it’s not just Japan and not just Hillary. Any central bank engaged in stimulative efforts – more than 80 at last count – risks flaming out their economy the way Japan has. And, any politician who believes in spending their way out of a crisis caused by too much money in the first place risks total ruin.

      As investors, we cannot afford to take sides – our job is to find the opportunities they create. Japan, a nation I love dearly, serves as both the canary and coal mine in that sense.

      Best regards and thanks for being part of the Total Wealth Family, Keith 🙂

      • R. J. says:

        Completely agree. Central banks around the globe are engaged in a financial experiment unlike any ever conducted on history by printing money that heretofore did not exist.

        My point is, that the next administration — whomever it may be — may have some difficult waters to navigate.

        And, as always, I appreciate your insights, so we can be on the right side of these dynamics.

        • Keith says:

          Thanks for the kind words and I agree totally. In fact, that seems to be an ongoing roblem in every political system…the lame ducks create a mess that’s portrayed as the next administration’s problem. Sigh…

          Best regards and thanks for being part of the Total Wealth Family, Keith 🙂

  2. Tony says:

    Wow, those statistics regarding the demographics of Japan are just astounding, I was aware about the Silver Surfers growing in numbers, but the stats regarding the younger generation and their lack of wanting to procreate goes against the raison d’etre for the human existence. Are these people already robots and don’t need to procreate only be manufactured!!!

    Whilst Japan’s biggest and brightest look for answers to this population conundrum, I always look back how humanity when at it’s lowest ebb and in darkest hours seems to pull something out of the bag and triumph through adversity…. I can only hope Japan doesn’t have to go that far down to pull itself out.

    I have no doubt that the economic and financial stories of the past decades have a bearing on current demographics in Japan, but it also seems to smack of social engineering on a grand scale…..though to what purpose other than destroying a proud nation I do not know. Here in the UK we have been subject to social engineering experiment (for want of a better word) during the last 12-15 years, especially during the Tony Blair years where basically the borders were non-existent and anyone could come into the country. It has changed beyond recognition from 20 years ago, some for the better but much for the worse.

    • Keith says:

      Thanks for writing and for such a thoughtful reply, Tony.

      To your point, I find it totally amazing that we seem incapable of recognizing change for what it is and adjusting accordingly…until it’s arguably too late. I used to spend a lot of time in London and remain stunned that the city I see today has changed so much just as Kyoto, Osaka and Tokyo have. Social engineering, indeed!

      Best regards and thanks for being part of the Total Wealth Family, Keith 🙂

  3. Vlad says:

    “… some temporary retrogression is to be looked for. Just so certainly as Japan has attempted that which is above the normal limit of her powers, so certainly must she fall back to that limit, or, rather, below it. Such retrogression will be natural as well as necessary: it will mean nothing more than a recuperative preparation for stronger and loftier efforts.”
    Hearn, Lafcadio. A Glimpse of Tendencies. (in “Kokoro. Japanese Inner Life Hints”). 1895.

    Comment. In 1895 the population of Japan was “only” 40 million. Now it is above 120. So during one century the population of Japan tripled. By the way in Russia the population is the same, if not diminished. Maybe it’s time for “retrogression”, as the country’s territory and resources are not sufficient for such a population? Maybe Japan is now on the way to “the normal limit” of 100 or less. There are no reasons to believe in the depopulation of Japan. It’s a natural cyclic process. Tide following ebb, and ebb following tide. No reason to be too pessimistic about Japan.

    • Keith says:

      Hello Vlad.

      That’s a very insightful observation and one that could apply to many things. I have often wondered if Mother Nature has a grand plan for the planet based simply on numbers and the availability of resources…or not.

      Best regards and thanks for being part of the Total Wealth Family, Keith 🙂

  4. Robert Whiteaker says:

    Hi Keith,

    Love your insights and no-nonsense advice and long range perspective. I was just curious, does Japan’s tax code have deductions for children as our does? If not, I wonder if having such would help the problem.

    • Keith says:

      Hello Robert.

      Thanks for the kind words – I appreciate them very much!

      To your question… Japan used to have something called a kodomo teate which loosely translates to family allowance. That changed to something else called the jido which was a form of reduced allowance for children all the way into junior high school. However, starting in 2011, high school kids are still covered by a deduction but no longer covered by the allowance. I think…

      Best regards and thanks for being part of the Total Wealth Family, Keith 🙂

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