Tuesday, September 21, 2010
As I noted last year:
Our savings is ... dramatically lower than Japan's when that country entered into its Lost Decade. So the Japanese were much better prepared than we are.
(I also noted that we're in worse shape than America was going into the Great Depression ... but that's another story).
Now, BIS - the central banks' central bank - agrees that Americans are in worse shape than the Japanese.
Specifically, a new BIS paper written by Shinobu Nakagawa (Director, Head of Investment and Market Research, International Department, Bank of Japan) and Yosuke Yasui (International Department, Bank of Japan) concludes that Japan was better able to weather the Lost Decade than the U.S. is able to weather our current economic woes, given three differences between the two cultures:
This paper aims to show the difference in vulnerability to financial shocks between Japan’s household sector and its banking sector and between the Japanese and US household sectors.
The average Japanese household has a financial balance sheet that is far more conservative than that of the representative household in other industrialised countries: in the case of Japan, cash and deposits represent half of total financial assets.... In contrast, the ratio for US households is only 16%, while Europeans hold about one fourth to one third of financial assets in these safe and liquid products.
Japanese households did not rely much on mortgage funding in the bubble period around 1990 .... The representative Japanese household accumulated the large down payment required for purchasing a home on credit and, unlike many homeowners in the United States, did not subsequently extract equity from the house through additional bank loans.
The conservative approach to debt taken by Japanese households mitigated the effects of the decade-long economic slump. Indeed, household bankruptcies were not widely recorded in that period because the quantity of safe and liquid buffer assets, such as bank deposits and postal savings, was always greater than debt on the average household balance sheet.
Credit risks are eventually concentrated in the Japanese banking system, which has
not changed fundamentally in decades.
Securitisation markets are, in contrast, well developed in the United Kingdom and the United States. UK and US banks are eager to transfer credit risks to a variety of investors in the financial system, including life insurers, pension funds and hedge funds.... Particularly for the markets in which off-balance sheet securitisation has deeply penetrated the credit markets – once credit, liquidity or other shocks occur, they could trigger the onset of risk contagion across a wide range of economic agents, including households.
The difference between the highest and lowest income groups [in the U.S.] is far greater than in Japan.... Net worth is much more evenly distributed in Japan [than in the U.S.]
The differences we found can be summarised as follows:
(1) Household leverage, relative to both safe and liquid assets and to GDP, is smaller in Japan than in other industrialised countries, and was so even during Japan’s bubble period.
(2) The finances of Japanese households were not severely damaged by the mid-1990s
bursting of the bubble. Banks, however, with their large accumulation of household
deposits on the liability side of their balance sheets, were a victim of their large
holdings of defaulted corporate loans and the resulting capital deterioration during
the bust; in response, banks tightened credit significantly during this period.
(3) Household net worth in Japan is not highly concentrated. Thus, regardless of income level, Japanese households are in general resilient to shocks thanks to a sizeable buffer of assets and moderate leverage. The situation is quite different in the United States, where the distribution of net worth among households is highly skewed in favour of the highest-income cohorts. With only a thin buffer of assets, low-income families in the United States – the subprime cohorts – could be vulnerable to market shocks.
On the other hand, U.S. age demographics aren't quite as horrible as Japan's.
As I noted last year:
Similarly, CNN Money reported last month:The chief economist for Standard and Poor's is now confirming the importance of national demographics:
The following chart shows that Japan has the worst demographics of all, with a staggering percentage of elderly who need to be taken care of by the young:
Chart 2: Old Age Dependency Ratios for Selected Countries
But I don't think [a lost decade in the U.S. is] as likely over here. For one thing, one of the problems in Japan was the demographics. And we don't have the problem of a declining population to deal with, although the labor force is going to slow down considerably as soon as the baby boomers retire.
Some economists think there is a very important difference between Japan and the United States that can't be overlooked. And it could keep the U.S. from plunging into a long-term deflationary spiral. Demographics.Indeed, as the following chart from Japan's Ministry of Internal Affairs clearly shows, the aging of Japan's population from 1990 onward has far outstripped the projected aging of the American population (trace Japan from 1990 onward with your finger; then do the same for the U.S. starting in 2010):
Simply put, the United States is not faced with as big of a percentage of people getting older and retiring as was the case in Japan during its Lost Decade.
According to research from Brockhouse Cooper, a brokerage firm based in Montreal, the percentage of people aged 65 or older nearly doubled in Japan between 1990 and 2008. Meanwhile, that percentage has stayed roughly the same in the U.S.
So even though there are a lot more people in the U.S. that are retiring as the Baby Boomer generation gets older, total population growth is rising due to high fertility rates and increased immigration. That's key since younger consumers tend to spend more.
"Demographics are the main difference between Japan and the United States. Aging in Japan was a huge issue that led to stagnation," said Alex Bellefleur, a financial economist with Brockhouse Cooper. "Senior citizens tend to have consumption patterns that are a lot different than their younger counterparts. They're not buying as many homes, cars and other durable goods."
There's also the issue of what governments have to do in order to support their aging populations. With a greater percentage of older retirees, that puts a bigger strain on fiscal budgets, which could contribute to deflationary pressure and economic sluggishness.
Along those lines, Japan currently has only 2.9 workers supporting retirees, said Tom Higgins, chief economist with Payden & Rygel, a Los Angeles-based money management firm. By way of comparison, there are 5 workers for each retired person in the United States.
For that reason, Higgins said it is an "overly simplistic generalization" to suggest that the United States is destined for its own Lost Decade just because the U.S. and Japan both experienced a nasty downturn following an asset bubble.
Simply put, the strain on the U.S. government by an aging population shouldn't be as severe as it was in Japan.
(America's demographics are still horrible compared to those of countries like India, but still better than Japan's).
Moreover, as I've previously pointed out, the peak spending years are younger in Japan than in the U.S.:
The peak Japanese spending range has been estimated to be comprised of 39-43 year olds. The more 39-43 year olds Japan has at any given time, the more consumer spending there will be, as these are the folks who are the big spenders in Japan. Dent argues that the Japanese economy will tend to grow when the number of 39-43 year olds grows, and to shrink when it shrinks.In other words, aging hurts Japan more than it hurts the U.S., because the peak earning years are 7 years younger in Japan than in the U.S.
In the U.S., Dent says, 46-50 year olds are the biggest spenders, because that is when - on average - they are paying for their kids' college, paying mortgage on the biggest house they will own during their life, and making other big-ticket purchases.
Of course, if unemployment doesn't decline, this point may be moot ... unemployed 46-50 year olds are not going to be peak earners.
Hat tip Tyler Durden.