Sovereign debt and pension commitments threatening Japan's economic stability
Japan, a nation known for its technological advancements and longevity, is currently grappling with an economic crisis that shows no signs of abating. The country's aging population and shrinking workforce are putting immense pressure on its pension system, leading to payouts being cut and the retirement program edging closer to insolvency.
The median age in Japan is the second highest in the world at 44.6 years old, and the Japanese people's resilience cannot guarantee survival of an economic crash, making it a risky investment for global investors. In fact, Japan's population decreased by a record 268,000 people last year, and the government projects a decrease from 127.5 million to 116.6 million by 2030, and 97 million by 2050.
The Japanese economy, only around half the size of the US, has faced stiff competition from China, Southeast Asia, and other countries in its export-based economy. Many Japanese businesses have decided to base their manufacturing and export operations in other countries to remain competitive.
In an attempt to boost exports, the Bank of Japan implemented a massive stimulus program larger than the United States' quantitative easing in 2013. The goal was to intentionally devalue the yen, but the devaluation has barely boosted exports and has not fixed the Japanese economy's issues. Japan's debt to GDP ratio is above 240 percent, the highest in the world, and currently, 43 percent of tax revenue goes toward paying interest on the national debt.
The Japanese government has raised taxes and implemented new ones in an effort to curb the national debt's rise. However, the sales tax in Japan rose from 5 percent to 8 percent in early 2014, with plans to eventually raise it to 10 percent. This increase has put a strain on consumers, further exacerbating the economic crisis.
Some economists have proposed unconventional methods to raise funds, such as a "handsome tax" to encourage family formation. However, the current Prime Minister of Japan, Shigeru Ishiba, who has recently announced his intention to resign but remains in office until a successor is chosen, has not yet endorsed these ideas.
In light of these challenges, it is advisable for global investors to stay clear of Japan and choose one of the many better alternatives to invest in, while keeping a close eye on developments within Japan that may affect the rest of the world. It is a precarious investment, with more than twice the amount of debt compared to its GDP and a rapidly aging population.
