Japan’s population is getting older. Today, the ‘land of the rising sun’ has the world’s highest median age, and is the world’s fastest ageing country. Largely as a consequence, innovation, investment and development are slowing, and this is contributing to the country’s ongoing economic stagnation.
During my recent trip to Japan – a country I love returning to – one of my initial observations was the number of people employed to perform a menial task. The same task, that might require a single person in Australia to complete, not infrequently employs three or four people in Tokyo.
For example, take the clearing of leaves from a small grate at the bottom of a downpipe attached to a tool shed at Yoyogi Park in Tokyo. In Australia, a gardener would grab a bucket and some gloves, clear the grate, put the leaves in the bucket and move onto the next task.
In January this year, I watched one gentleman hold the grate, another clear the leaves and deposit them into a bucket being held by a third gent, and the entire enterprise was being protected by a fourth individual holding a glowing red wand to direct people around the dangerous ‘construction’ site.
Early one morning, on another walk from my hotel in Shibuya to Setagaya, I was stopped on the footpath by four uniformed men, also holding red glowing wands, who marched in formation to stop pedestrians from crossing a driveway while a resident of the attached apartment block exited the building by car. Again, here in Australia, we would have either nobody performing that task, or perhaps one person if it was a commercial driveway operated by a department store.
The globe’s fastest ageing country
My observations highlight several issues, which include the prioritisation of employment, an employment structure that promotes tenure over merit and finally a rapidly ageing population. The latter is arguably currently unique to Japan, but it is a problem that might confront many developed nations in the not-too-distant future.
According to a European Parliament briefing paper, “With a median age of 48, the world’s highest, Japan is the globe’s fastest ageing country. It can be defined as a ‘super-aged’ society, i.e. a country where more than one in five of the population is 65 or over. In Japan, in fact, more than one in four people are 65 or over – 28.7 per cent of the population, making up 36.17 million (almost the population of Poland), according to government statistics released in September 2020; this makes Japan the country with the oldest population by far.”
Japan’s population is ageing rapidly, and consequently, its working-age population is falling even faster. The consequences of Japan’s ageing and shrinking population include economic crisis, budgetary challenges, the observed pressure on job markets and the depopulation of rural areas.
According to a study by the independent think-tank Recruit Works Institute, Japan’s working-age population is expected to begin declining rapidly in just four years’ time. From today’s level, Japan’s supply of workers is expected to have fallen by 12 per cent in 2040. And according to the Recruit Works, this will occur even as labour demand remains steady – remembering of course many people are already performing menial tasks that fewer people could perform in other nations.
Is innovation in Japan actually slowing?
The reason for the latter circumstance is of course that innovation, investment and development are slowing in Japan as investors work out that the ageing and shrinking population is not an environment conducive to growth.
Japan gave the world its first high-speed rail network. It was known as yume no chotokkyu — literally meaning the “super-express of dreams.” Part of Japan’s now world-famous shinkansen network, it would come to be known as the “bullet train.”
As an aside, and perhaps as a note to governments now arguing over essential infrastructure spending, Japan’s shinkansen was built despite fierce public opposition, and what was then described as “astronomical” costs.
Japan borrowed U.S.$80 million from the World Bank for construction and the project’s leader, Shinji Sogō, resigned amid the scandal of an out-of-control budget. Eighty million now seems a pittance. In decades to come, the same will be said for projects that today seem to have blown multi-billion-dollar budgets. Just get it done.
Japan’s shinkansen was launched in 1964. That’s a long time ago for a major Japanese innovation.
According to Forbes magazine, Japan is home to 10 per cent of the world’s most innovative companies. But many of their innovations are consumer products such as the calculator (1970), the Walkman (1979) and the blue LED light (1990s), which paved the way for energy-efficient TV, mobile and computer screens, as well as power-saving lightbulbs.
Today, Japan’s 126 million people are already feeling the early effects of a working-age population that is expected to decline by a fifth from 2020 to just 60 million by 2040, according to Recruit Works.
Take for example, the crisis in the logistics industry. A shortage of truck drivers and the effect of new regulations on hours worked, means as much as 35 per cent of all freight across Japan will not be shipped in 2030, according to Nomura Research Institute Ltd.
Another consequence, as one of the planet’s most aged nations, with one in five citizens in Japan aged 70 or older, is that according to a Japanese government report in 2019, drivers 75 years of age or older caused more than double the number of fatal accidents in 2018 than younger drivers did. More specifically, the over-75s caused 8.2 fatal crashes per every 100,000 on the road, “about 2.4 times the number caused by those aged 74 or younger”.
What’s causing Japan’s demographic crisis?
Japan’s demographic crisis is the consequence of the combination of two elements: high life expectancy and a low fertility rate.
The European Parliament briefing paper notes “Japan’s fertility rate began to decline in the 1970s. It reached its minimum in 2005 (1.26 births per woman), then bounced back, though never to replacement levels. In 2016 it began declining again (to 1.36 in 2019). This is combined with increasing age at first marriage and decreasing rates of marriage: in 2015, the proportion of people who had never married aged 50 was at a record high of 23.4 per cent for men and 14.1 per cent for women. This has contributed to a lower birth rate – in Japan in 2018 a mere 2.3 per cent of children were born outside marriage. The COVID-19 pandemic has added to this trend: the number of notified pregnancies in the three months to July 2020 fell 11.4 per cent from a year earlier, while the number of marriages over the same period dropped by 36.9 per cent.” The reason for the interest in Japan’s structural issues is its impact on the profitability of many of its corporations. Japanese corporations’ return on equity, has only exceeded 10 per cent in aggregate twice in the last decade.
Companies listed on the Tokyo Stock Exchange’s first section, excluding those in the financial sector, turned in an aggregate return on equity (ROE) of 10.1 per cent in fiscal 2017, according to a study by Nikkei. Their low capital efficiency has meant Japanese companies have been priced lower. A further consequence of the problems cited above, is the country’s companies have historically put far more focus on maintaining market share and employment than on maximizing shareholder returns.
As measured by consensus 12-month forward ROE capital efficiency in Japan is dramatically below that of its developed-market counterparts.
When investing globally, it remains essential to look for quality. A shrinking economy doesn’t help.