US Asian Headache: Japan Is Shrinking!

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Roger Boyd
Geopolitics And Climate Change

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US Asian Headache: Japan Is Shrinking!

JUL 19, 2024

Japan is the pivotal power for the US in Asia, a reliable vassal with a population of 120 million and a large manufacturing sector. With prodding from the US, its comprador leaders have moved away from the non-aggressive orientation built into its post-WW2 constitution (written by and imposed by the US) toward a more militarized and aggressive stance; specifically anti-China. But as the US works to strengthen the Japanese orientation as its aggressive anti-China puppet, the nation has tipped into medium and long term decline.

Demographics

The article “Koizumi’s Coup” by Gavan McCormack covers the start of the move to neoliberalism. His book “Client State Japan in the American Embrace” covers the over two decades of neoliberalism in more detail.

The following also details the neoliberal turn in Japanese society, the specific discussion of Japan starts at 17:54.

reported by the Atlantic Monthly. The inflation effects of the COVID pandemic in Japan then just intensified the problem, which has been added to by Japanese women’s increasing unwillingness to deal with misogynistic attitudes and unfulfilling and unequal relationships; a change seen in all nations with rising female education and job opportunities. The result is documentaries such as the following:

Industrial Decline

Ever since the conscious economic and financial war waged on Japan by the US in the 1990s, and the turn to domestic neoliberalism, Japan has been in relative industrial decline. Given the high level from which this decline started, and the relative technological weakness of its neighbours (i.e. China) until recent years, this has not yet turned into a full blown economic and financial crisis. But with China now having climbed up the technology ladder to the point of challenging Japan’s major industries (cars, consumer electronics, computers, petrochemicals, pharmaceuticals, shipbuilding, aerospace etc.), the industrial decline is set to accelerate. Japan’s biggest industry, car manufacturing, has already to all intents and purposes exited the European market and is now being rapidly pushed out of the Chinese market. The Chinese manufacturers are now set to force it out of pretty much all global markets except the domestic Japanese and a US market protected from Chinese competition by the anti-China tariff equivalent of the Berlin Wall.

Financial Implosion or Inflationary Decline

Japan has benefitted from the fact that the majority of its massive government debt, 263% of GDP (44% of which has been monetized by the Bank of Japan), is held either by the central bank or in accounts and investment organizations that have a very low sensitivity to real (inflation adjusted) interest rate levels. The nation also has a significant net positive balance in foreign investments, providing a steady stream of foreign exchange income to help provide for a current account surplus in the face of a trade deficit that had rapidly increased to - 3.76% of GDP in 2022. The trade deficit was turned around in 2023 and the first half of 2024 due mainly to the benefits of a much lower Yen exchange rate and increased shipments of cars to the US.

will see a doubling of Japanese government interest payments in the next decade. These already represent almost 25% of planned government expenditures in 2024. At the same time Japanese government social expenditures (one third of all government expenditures) keep increasing as the population keeps ageing, and revenues will be negatively impacted by a smaller working age population. And at the same time the government is ballooning defence spending at the behest of the US and an increasingly nationalistic and militarily aggressive leadership class. Since the 1990s there has been increasing divergence between tax revenues and government expenditures, made worse by the COVID crisis; the deficit was 5.05% of GDP in 2023.

There are rosy forecasts for a reduction in the government budget deficit in future years, which require solid economic growth and still low interest rates. With the Japanese GDP being negative in Q3 2023, flat in Q4 2023 and negative again in Q1 of 2024 and Japanese interest rates doubling in the first half of this year, such forecasts look delusional. The only real way out of Japan’s debt problem is inflation plus GDP growth that is significantly above the rate of interest on government debt, which is very much against the interests of the wealthy individual, and institutional, bond holders. But this is starting to be taken out of their hands as this reality is reflected in the foreign exchange markets. A falling Yen both serves to increase inflation and improve exports (although it also greatly increases the costs of the energy and raw material imports that Japan relies upon), while the Bank of Japan can keep interest rates down through further monetization.

wages lagging far behind inflation. Forecasts of a small Japanese recession in 2024 may be extremely optimistic. The risk becomes that a falling Yen becomes seen as a one-way bet and instead of a currency decline, a currency collapse ensues that wreaks havoc with the domestic economy and will require deep domestic deflation (i.e. much higher Japanese interest rates and massive government expenditure cuts) which may only exacerbate any crisis. The only alternative would be capital controls and debt defaults, which would be greatly resisted by Japan’s US masters. In the past week the Bank of Japan has directly intervened in the foreign exchange market to slow down the decline of the Yen, but this may only act as a speed bump.

When I visited Japan in the mid-2000s I noticed that Japan had gone from horrifically expensive to foreigners to extremely reasonably priced in a couple of decades. Nowadays, Japan has become a relatively little-known cheap vacation option. Fundamentally, the Japanese government cannot square the circle and the Japanese general population will become increasingly older and relatively poorer (and the Japanese economy smaller). An ageing population is also more motivated to cash in savings bonds to fund everyday consumption, rather than to save. And an increasingly precarious younger generations will have less ability to save. Only a falling exchange rate which drives domestic inflation, combined with an ongoing central bank holding down of interest rates below the rate of inflation, will allow Japan to limp along without a full blown crisis. But in such circumstances a currency crisis will always hover in the background, with the Japanese drive at rearmament and increasing opposition to China only making things worse.

An Increasingly Weak Vassal

Within a decade, the Japanese population could be 10% below its current level - a fall of 12 million people concentrated within its working age and younger population. As the birth-age female population continues to shrink, the population decline then becomes a self-fulfilling accelerating decline. Property values in Japan have already substantially crashed from the bubble era, but are set to decline much more. What may stop any Italian-style influx of Western buyers is the Japanese language and culture, as well as its increasing levels of nationalism (which may stop any influx of rich Chinese buyers). Although we are seeing an increasing number of reports such as this from Australian television:

“The asking price is unbelievable” says the Australian woman, comparing the AU$50,000 cost to the manic home price bubble in her home country. Foreigners should be careful to leave their savings in their home currencies though, given the probable ongoing collapse in the Yen. They should also be careful of ending up in dying communities as the Japanese population shrinks. And this Australian report:

Also, how long will the extremely homogeneous Japanese population be welcoming to such immigrants that live better than they do as their own incomes and futures continue to deteriorate? At the very same time the shrinking Japanese working-age cohort has increasingly become open to working abroad, as Japanese employers resist raising real wages in the face of a declining workforce.

The path for Japan from an industrial powerhouse in the 1980s to a deindustrialized and declining nation, with its gifted youth increasingly looking abroad while foreigners buy up its cheap real estate, is being rapidly set. Perhaps its tourist industry will also become much more dominant as it becomes cheaper and cheaper for foreigners to visit? This is not the future of a strong US vassal but that of an increasingly weak one, while China (and ASEAN and EurAsia) continues to gain in strength.

South Korea

it no longer sells cars in China. The extremely cozy relationship between the South Korean government and a handful of large corporations (the Chaebol) has created a significant corporate over-concentration and extensive corruption, made worse by neoliberal policies and low capital gains taxes. Creating both a growing level of income and wealth inequality, and an economy highly exposed to the possible failure of a handful of corporations and industrial sectors. And also a great bifurcation in salaries between those lucky to be a full time employee of a Chaebol and those not.

With Russia now using North Korea as a source of munitions and other military equipment, the Ukraine War may provide the economic boost to North Korea that the Korean and Vietnamese wars provided to Japan and South Korea. Or perhaps also a source of workers for desperate South Korean corporations and a driver for a reintegration which would be a nightmare for the US Empire?

Philippines to the Rescue of Empire?

this article notes, becoming a manufacturing powerhouse remains a pipe dream to the Philippines, with the share of manufacturing in the nation’s GDP actually shrinking in the past decades. With Filipino students lagging far behind those of other nations (77th out of 81 on a measure of math, reading and science) and widespread corruption, it will remain trapped in growth without development. Another weak vassal, also facing the possibility of an energy crisis as its domestic gas production stalls. The Philippines does have a large and growing young and poor population, so perhaps they will be willing to die for the US Empire?

A Related Note On China

Those conflicting signals on Monday showed ongoing strength in industrial production more than offset by tepid consumption as the property slump continues, leading to the slowest quarterly growth pace in five quarters. But through the fog a silver lining is becoming clear: Xi Jinping’s long quest for technology-driven “high-quality growth” is actually starting to pay off.

If Beijing can keep batting away US-led containment efforts, exclusive analysisfrom Bloomberg Economics forecasts the hi-tech sector will account for 19% of gross domestic product by 2026, up from 11% in 2018. Combining what Beijing has dubbed the “new three” — EVs, batteries and solar panels — the proportion of GDP swells to 23% of GDP by 2026, more than enough to fill the void from the ailing real estate sector, which is set to shrink from 24% to 16%.

“Pessimism on China’s prospects is understandable but also overdone,” say Chang Shu and Eric Zhu, economists with Bloomberg Economics. “The government might just be about to pull off a great rebalancing.”

This report puts the drop in Beijing property prices at 10-30% from peak, and falls could be significantly larger outside such a Tier 1 city. With Chinese inflation of approximately 6% since 2020 and GDP per capita real growth of about 20%, that’s a fall of more than 36% and 56% relative to nominal GDP per capita in a Tier 1 city. With moderate inflation and continued 5% growth, and a slow controlled unwinding of the overhang in unsold properties, the Chinese house price to income range could be brought into a reasonable range of 3-4 from its current level of around 11 (from a peak of 29 in 2020) during the next decade. As about 75% of domestic retail savings are tied up in housing, and a huge amount of mortgages taken out against housing, it is important that Beijing deflates the bubble slowly rather than a risk a triggering of a debt-deflation cycle. Chinese house price falls do seem to be accelerating this year, so we can expect more government action to control the rate of deflation.

In addition, the Party-state has taken actions to shut down the private tutoring industry which helps lead to extremely high costs for Chinese parents wanting their children to succeed, and provides extensive advantages to rich parents, in China high school and college entrance exams.

We will see if such actions lead to any increase in Chinese birth rates, or perhaps just a halt to the long-term fall.

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