The combination of ageing populations and declining fertility rates means the world is following the Japanese model into deflation – despite all the efforts of policymakers to artificially induce price rises via their money-printing. As discussed last November, under the title. “Oil price fall set to push Japan back into deflation“, it was already clear then that the impact of Abenomics had peaked in mid-year.
Inflation had temporarily hit 3.7% after the sales tax increase and yen devaluation. By November, a panicked Governor Kuroda, head of the central bank, was pushing through an emergency stimulus policy. But as the chart above confirms, his measures have had little effect. July inflation was just 0.2%. The issue is one of common sense:
- Most policymakers insist on seeing supply/demand balances through rose-tinted glasses
- They imagine that demand is always constant, if only the right tax and spend policies are adopted
- They thus ignore the human factor altogether, and claim that 70 year-olds will spend as much as 30 year-olds
- Yet their own official data confirms what common sense would tell us on this issue
What worries me now, is what happens next? Japan’s former central bank head, Governor Shirakawa, had an excellent grasp of the economic impact of demographic change. He was a major influence on our thinking in Boom, Gloom and the New Normal, as he argued that Japan’s:
“Low growth was mainly attributable to demographics, or more specifically, a rapid aging of the population”….
“The implications of population aging and decline are also very profound, as they contribute to a decline in growth potential, a deterioration in the fiscal balance, and a fall in housing prices. Given that other developed countries will face the same problems despite some differences in timing and magnitude, the economic effects of demographics deserve further study.”
Today, the failure of his successor’s policies is confirming the wisdom of Shirakawa’s insight. 70 year-olds are not 30 year-olds:
- They do not have the income that would enable them to spend in the same way
- And they do not need to spend the same amount as they already own most of what they need.
Japan’s recent policies have been the equivalent of trying to make water run uphill. But now China’s New Normal policies are the catalyst for reality to appear. Today’s chaotic markets are a sign that investors are starting to realise they have been fooled.
It is going to be a very bumpy ride as we return to a world that operates by the fundamentals of supply/demand, and not by central bank stimulus.