Economic Sushi

The headlines are all about how Tokyo was almost evacuated in the wake of the Fukushima Daiichi Nuclear Power Plant meltdown a year ago, but the real Japanese story is an even bigger elephant in the room. We all know that Japan is a very large and important economy, only slipping to third place behind China in 2010 (and obviously the U.S.). The per capita, however, puts them somewhere between 16^th and 18^th in the world depending on whose statistics you believe. We all know that Japan is an exporting powerhouse – with products ranging from Sony electronics to Toyota cars to Hitachi MRI machines to Elpida microchips – having not experienced a trade deficit since 1980. In terms of owning U.S. national debt, Japan as gone a long way to buy U.S. bonds, and with just shy of $1 trillion of such debt in their coffers, they are second only to China in this category (the U.K. us third with less than half of Japan’s total holdings).

But the face is Japan is changing rapidly. While many Western countries have some moderate population contraction, Japan’s contraction is profoundly dynamic. With an estimated current population of about 127 million, according to a United Nations report, by 2050 that number will drop to 105 million. What’s worse, Japan’s population is skewing older than any other country in the world (currently the media age is 44.8, and getting older fast), which will result in one of the lowest ratios of working adults against retired elders, a fact that threatens so many assumptions about how Japan could possibly support such a massive older, non-working population.

But there are other signs of displacement in Japan; notably the cost of Japanese labor is slowly making her less competitive. Consumer electronics, microchip manufacturing, appliances (especially televisions), heavy industry and automobile production are being slammed by lower labor costs and increasing quality control from global competitors, but more importantly from regional powerhouses like Korea, Taiwan and the Peoples Republic. Unemployment in Japan is tilting up, and the once sacred notion of cradle-to-grave single employer jobs is vaporizing in an era of competitive cutbacks. Subsidized local agriculture and the government practice of shepherding “cheap money” debt to its corporate giants (in lieu of more traditional access to the capital equity markets) are also taking their toll. The world’s third largest PC chip-maker, Japan’s Elipda Memory, just filed for bankruptcy.

Solid entry-level jobs, even for college grads, are hard to come by in these difficult economic times. The issue of a “lost generation” is a sore spot in Japanese politics. Kids aren’t leaving the nest as early anymore, and the general economic malaise hung over Japan for more than a decade before the rest of the world suffered economic collapse. Still, Japan remains an economic powerhouse, which, it claims, has been severely, albeit temporarily, injured from the massive damage inflicted by the recent quake-tsunami-nuclear meltdown. But the overall numbers coming out of Japan suggest that a bit more caution may be justified.

If Greece is the economic disaster poster child with a deficit/debt-to-GDP ratio of 1.64 (the U.S. is at about 1.15), what is Japan where that ratio is 2.20? Nobody really worried about that huge ratio, because, after all, Japan made things and exported them. Growth and exports would fix that, they believed. Japan had a long-standing trade surplus that was the envy of the United States. But then the news began to come in, and the quake-tsunami-meltdown excuse seemed only partially to blame: “First came news last month that the country had posted a $32 billion trade deficit for all of 2011, the first time that’s happened since 1980. Then, on Feb. 20, Tokyo announced a record shortfall for January of $18.5 billion, citing a strong yen that’s depressing exports and rising prices for energy imports. Japan may well record another yearly trade deficit in 2012. Now economists are worried that the nation’s current account could turn negative, raising questions about Japan’s ability to handle its $10 trillion-plus government debt load. That burden is equivalent to about 220 percent of Japan’s total annual economic output, the highest debt-to-gross domestic product ratio in the world…

“This slide in Japan’s trade competitiveness is far more troublesome than fluctuations in the value of the yen. Unless things turn around soon, Japan is on track to make deeper deficits in its trade account. At some point, those deficits will eclipse the country’s capital account—that is, the income and dividends earned by the Japanese factories and foreign investments. Then, Japan’s entire current account will go into deficit, and the archipelago will join the illustrious ranks of debtor countries such as the U.S., Italy, France, and the U.K.” Bloomberg BusinessWeek, February 21^st.

In the end, this may be nothing more than an economic history less, one that American politicians who prefer mythology to facts may well want to pay attention to. Societies that upgrade their social standards without vast increases in productivity and quality usually run into rising economic powers that haven’t leveraged themselves into a better lifestyle. Without increasing that productivity, through targeted upgrades in technology, training and education, the insurgents are always going to rise past the incumbents.

I’m Peter Dekom, and the one true thing is that “everything changes.”