The Weekly View: Demographics and the New Normal
My thanks to Rod Smyth, Bill Ryder and Ken Liu for their excellent letter, published by RiverFront Investment Group. Here is the opening:
Japan is often derided for its 'lost decade' (now two) of stagnant growth following the collapse of its real estate and stock bubbles in the early-1990s. Japan's cautionary tale of political, institutional and corporate sclerosis is well known. However, another salient takeaway for the US and other developed nations is from Japan's demographic transition - its population is getting older - since a country's long-run stainable growth rate is a function of the growth of its working-age population (WAP) and productivity.
Adjusted for demographics, Japan's performance can be judged more favourably. Daniel Gros, director of the Centre for European Policy Studies, writes: "When one looks at GDP/WAP (defined as population aged 20-60), one gets a surprising result: Japan has actually done better than the US or most European countries over the last decade. The reason is simple: although Japan's overall growth rates have been quite low, growth was achieved despite a rapidly shrinking working-age population."
David Fuller's view I assume that the Centre for European Policy Studies adjusted GDP for inflation in their calculations, but if not, Japan's performance would look better still.
What about Japan's stock market?
Japan's TSE Second Section Index (monthly, weekly & daily) is the one to watch in my view, because it has so often led in the past. It could be on the verge of base formation completion and a close beneath 2360 would now be required to question this hypothesis. Meanwhile, TSE2 remains historically cheap.