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How demographics shape returns

Fewer people creates a ‘Japanisation’ problem
January 10, 2019

I remember, post-Big Bang, when the Japanese arrived in The City. Brandishing cheque books and pens at the ready, they poached bankers and brokers to populate their start-up businesses, admittedly with the more spivvy, rather than patrician, end of Europe’s spectrum. The FT’s old (and soon-to-be-new) headquarters, Bracken House, was sold for what was then the highest price per square foot, I think – and my lot (correctly) called the top of the market.

Their bankers, firmly believing they had the Midas touch because they’d performed such a massive post-war transformation of their country, convinced Tokyo dwellers to take out 100-year mortgages, a ‘legacy’ to bequeath to their children and help them on to a hopelessly expensive property market. Female workers only wore French designer labels, and the Yakuza (organised crime) flourished. Does this, in any way, sound familiar?

They soldiered on despite the biggest stock market bubble – which burst spectacularly. Then followed tumbling house prices, exporters struggling, and of course banks riddled with bad debts. All were kept on life support by government largesse: easy (or free) money, a deliberately weak exchange rate and subsidies. Ring a bell?

Yet still generations of Liberal Democratic Party voters managed to maintain the status quo, despite little progress anywhere. Prime Minister Abe is just another in a long line of hopefuls, his three economic arrows failing miserably to hit his modest targets: inflation at 2 per cent, or so; a normal interest rate curve; economic growth at something a little higher than a snail’s pace. The only thing they’ve managed is full employment.

And still we Westerners laughed, labelling the problem ‘Japanisation’ – until it dawned on some that it was coming our way. The problem is ‘simples’: it’s demographics. Fewer people mean a smaller economy. The UK and US’s falling birth rates and ageing populations have been masked by massive immigration. Some of the worst population profiles and prognoses lie in Catholic countries – Italy and Spain, eventually Latin America – also Eastern Europe, South Korea, and of course China, with its one-child policy. Selective abortion of female foetuses means that today there are 25m more men than women aged 15-44 (child-bearing age) in mainland China; India isn’t far behind.

How does all of this look financially, in my charts? The cautious elderly, fearful of longevity, save and don’t spend – ergo, super-low interest rates, maybe forever! Unsellable residential real-estate in secondary towns and country; they’re giving the stuff away in Japan (because council tax is due even if empty), bulldozing the eyesores in Baltimore and Detroit, and whole Italian hilltop villages can be bought for a song.

Employees, of which there are fewer and fewer as a proportion of total population (hence full employment), are forced to get on their bikes and live where the work is, cohabiting or inhabiting dwellings of 20 to 50 square metres – ie rabbit hutches. No wonder we’ve reached ‘peak stuff’ and are willing to spend more on ‘experiences’, such as eating out (a tuna sells in Tokyo’s fish market for $3m), holidays and entertainment (which includes fitness). ‘Virtual reality’ is a coping mechanism.

Against this background, many conventional businesses will struggle. Utilities, on the other hand, should benefit from economies of scale and ease of distribution; it just depends on how big a slice they are allowed to keep – or whether they are nationalised because they are considered ‘too big to fail’ – like the financial system.