Originally published June 2022.
(Even though it might eventually cease to exist.)
Japan’s death rate exceeds its birth rate, prompting speculation that the country could eventually cease to exist if nothing is done to change this. In addition, Japan’s ageing and shrinking population may also raise questions about the long-term prospects of its economy. However, upon taking a closer look, Japan’s economic performance and environment arguably present it as a suitable place to store wealth, particularly amid the increasing uncertainty in the world.
First, Japan is a developed country well known for its overall stability. Its citizens coexist with minimal political and social divisions, unlike many countries in the West. Indeed, the sense of security that Japan provides, together with the attractive funding options available, has allowed the country to enjoy a steady inflow of foreign capital seeking stable investments in the real estate market.
“The strong real estate market worldwide has been supported by the low interest rates maintained by central banks across the globe”
Going forward, the global interest rate environment may have a significant impact on the mid-term prospects of the world, including Japan. Presently, the strong real estate market worldwide has been supported by the low interest rates maintained by central banks across the globe. However, many central banks are currently worried about historically high inflation rates and have thus been implementing interest rate hikes. In contrast, the Bank of Japan has decided to keep interest rates low and the movements of the JGB yield curve look mild so far and are expected to be manageable. Inflation is forecast to be mild in Japan overall, because wage movements have been stagnant, suggesting that demand-side factors should not apply much pressure on inflation. As a result, the CPI will mainly be elevated only by cost-push factors and is expected to rise to the mid-2% range. Eventually, the weak demand is likely to curb inflationary pressure.
Looking at world demographic trends, many countries, even China and India, are or will soon be characterised by an ageing population and a subsequently declining population. This ageing population trend has caused savings to rise and consequentially result in an increase in investment volumes from pension managements. Overall, many major economies around the world are likely to increase their record-low interest rates to prevent overheating in the market and curb inflation. Nonetheless, these increments are expected to be mild because of the saving glut stemming from the rapidly ageing demographic across the globe.
When considering Japan’s prospects, it should be noted that the country’s GDP growth per working age population has fared better than most of the other G7 nations over the past two decades. This suggests that the economy has been performing well overall, although negative impacts from the ageing population will admittedly have a lingering effect and cause worry for its economic outlook. However, it should be noted that Japan’s spending on social benefits per elderly person has decreased over the past decade. Indeed, spending on pensions were reduced due to reforms made to the national pension law in 2012. Additionally, although they are low, Japan’s fertility rates have remained mostly unchanged over the past two decades, whereas other similarly developed countries, like South Korea and Singapore, have seen notable drops in comparison. The growing number of foreign residents, still accounting only for 2.3% of Japan’s population with room further growth, may further help support the country’s population base.
Japan has also made additional plans, like decreasing spending on medical insurance and increasing the retirement age to make spending practices more sustainable in the long term. For example, from 2022, elderly individuals above the age of 75 that meet a minimum income threshold will be required to bear 20% of their medical expenses, up from 10%. While there will be challenges going forward, Japan seems to be reasonably prepared for them. Indeed, at over US$120,000, the median amount of wealth per adult in Japan is high, according to Credit Suisse, meaning that the country and many of its citizens should be able to brace themselves for tougher times ahead.
Overall, Japan has many pull factors with a sustainable economic base. Therefore, the country appears suitable as a place to store wealth.
