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Living standards and the Japanese market

John Redwood, Charles Stanley’s Chief Global Economist, looks at the economy where GDP per head is growing at a faster rate than many EU countries.

John Redwood

in Features


Much investment commentary looks at the overall growth of income and output for each country without pausing to consider the growth in income and output per person. Market participants also tend to look at the most-recent figures, and strive to forecast the next numbers to come out. Sometimes it is worthwhile looking at the longer-term trend.

Income per head is in some ways more important than aggregate national output. People want to feel better off and to be better off. If a country’s economy grows because more people have come to live and work there without any improvement in average living standards, there is not the same improvement in confidence and wellbeing you get if the economy has grown because income per head has gone up. The period since the great western crash of 2008-9 has been a difficult period to get living standards rising again, which is why we have seen unusual monetary policies, and fraught politics. Authorities have struggled to create enough consumer and business confidence, and have agonised over whether to encourage more debt or not. Since 2009 one of the best performers at raising GDP per head has been Japan, with a 13% gain from 2009. This has been disguised by a falling population, which makes the more normal output and income figures look disappointing. The US, the UK and Germany have also recorded double figure percentage gains since 2009 in GDP per head, leaving them usefully above the 2008 levels pre-crash. In contrast Spain has only recently got back to 2008 levels whilst Greece is still almost one quarter down on the pre-crisis highs. France has managed only a small gain over 2008.

Japan is often undervalued compared to other advanced markets as people are suspicious of the continuous monetary experimentation and the apparently low growth owing to population decline. The stock market reached a spectacular peak at the end of the 1980s and has still not regained those levels. There has been a long period of very low interest rates or negative rates. The Bank of Japan has bought in great quantities of Japanese government debt and has also bought up some share-owning Exchange Traded Funds to inject more money into the system. Large programmes of Quantitative easing and ultra-low rates have helped stimulate a bit more activity, but have not led to much inflation. This year has been disappointing with two down quarters punctuated by some growth in the second quarter of the year. Inflation has remained at 1.4%, whilst the average growth rate in total GDP has been around just 0.5% a year since 1980. Corporate Japan has been rocked by scandal and struggles to become as aggressive over profits and margins as some western competitors. The big Japanese crash did a lot of damage and cast a long shadow over assets and the economy generally.

The Japanese authorities have an urge to try to create more normal policy. The government is saying it will raise the consumption tax again, from 8% to 10% in the autumn of next year. They would like a lower deficit. The last time they tried this there was consumer buying ahead of the event, and then a long trough with confidence damaged. This time they are trying to think of offsets to prevent too big a fall in spending. The Bank of Japan has been experimenting with buying fewer government bonds. It allowed the ten-year bond yield to rise to a heady 0.16% compared to the more normal level around zero. More recently it has taken it back down to 0.06%. Whilst the gross debt is very large compared to GDP, the Bank of Japan now owns well over 40% of it. The system is so far surprisingly stable, with so many of the bonds bought in and with the balance of the debt financed at such low rates of interest.

The absence of serious inflationary pressures and the fact that most of the debt is owed to Japanese people and institutions means there is no imperative for the authorities to tighten policy. Markets will tend to worry that any small move toward normal will set Japan back again. Meanwhile we should not underestimate their achievement at steadily raising living standards and delivering GDP per head above many EU countries. Shares listed in the country look reasonable value, and will benefit as and when the authorities recognise again that “abnormal is the new normal”. The decline in population, the trend to more elderly people as a proportion of the total and the absence of wild inflationary tendencies makes Japan different. The government will have to worry more about the poor growth performance this year, and less about their continuing to borrow huge sums at no interest rate to try to keep people in work.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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