Japan’s new government has embarked on a desperate gamble to restore economic growth after 2 decades of decline.
Unfortunately, it is doomed to fail. The chart from the Financial Times, explains why. And the reason is very simple:
- One in four Japanese are now over the age of 65
- And this proportion is continuing to rise, as Japanese women now have an average of just 1.48 babies
- At the same time, life expectancy has reached 84 years and is still rising
As common sense and government data tell us, older people spend much less than younger people – who need to buy new products for the first time. Older people are instead a replacement market, as they already own much of what they need.
Equally important is that older people see their incomes fall as they enter retirement, whilst younger people are still building their careers and earning more each year.
These factors matter because household consumption is 60% of Japan’s GDP. If it falls, GDP falls. Equally, if people spend less, there will be deflation.
Japan, of course, is not alone in having an ageing society. Germany and Italy, also G7 members, already have more than one in five of their population aged over 65. A fascinating FT interactive graphic shows how most countries have been ageing since 1980. It also shows how incomes relate to age in each country.
- Household spending peaks at ¥3.5m ($35k) in the 40-49 age group
- It falls 13% to ¥3.1m in the 60-69 age group, and by a further 22% past this age
- Most areas of spend reduce after the age of 60, except for medical spend
The new government is not planning to suddenly increase the incomes of those over the age of 65. It is instead going to do the opposite and increase the consumption tax, to try and reduce the enormous debts run up during the previous failed stimulus programmes since 1990.
And even if it did increase salaries and pensions, it is likely that people would save the money rather than spend it. Most did not expect to live so long, and so they need to save more.
The conclusion for companies is clear. Not only will Japan’s stimulus programme fail. But future Japanese growth for their products will have little connection with GDP growth. Instead it will depend on people’s age and their income levels.