Asia’s Hope is born

• Noa is two months old
• Japan is the canary in the demographic coal mine
• Do you want to learn about demographics the hard way?

My son is two months old today. But I only just found out what his name is. Well, I only just found out what his name really means when written in Japanese characters…

Noa is in the top three percentile for height and weight. He was born with more hair than I have now, sleeps like a baby (in the intended sense of the bizarre idiom), and constantly smiles like a very happy drunk.

But one lunchtime, I realised that I didn’t know how my wife had chosen to spell his name in Japanese!

You see, Japanese names have particular meanings. But because there are a lot of homonyms in Japanese, the meanings can vary for each particular name. Two people with the same pronunciation of their name can write their names differently and therefore have different meanings.

It’s often polite to ask someone which particular meaning their name carries, and that is determined by how it is written. Which is why you often see Japanese people who meet for the first time writing squiggles in mid-air.

Noa’s name, written in Japanese kanji, apparently means “Hope Asia”. Or, in the order Western people would put it, “Asia Hope”.

Now, I haven’t got the foggiest idea why this is the meaning my wife chose for his name. But, given he’s my third child, it makes for a good introduction to an article about Asian demographics, doesn’t it…?

It’s certainly better than his mum’s name. She was “Cheap and Honest” until I married her. Now she’s just an “Honest Hubble”.

But why would you want to hear about declining demographics in the midst of housing shortages, whopping immigration and an illegal immigration crisis? Doesn’t the UK have too many people, not too few?

Well, the UK does face a rapidly ageing population – that’s part of the reason why the population is growing so fast despite declining fertility rates. People are living longer. It’s also what Japan faced before its demographics turned into an outright decline.

According to The Japan Times, Tokyo is the only prefecture in Japan whose population is projected to grow over the next 25 years. Some municipalities will see their population halve! Japan’s overall population is expected to fall by 17%, and the share of retirees will surge.

Developed English-speaking countries, like the UK, stand apart from the rest of the developed world in their ability to have both much higher immigration and a slightly higher birth rate. But this may only delay the downtrend.

Japan, with not much immigration, is one of the most extreme examples of demographic change and one of the earliest to go through the transition, but the rest of the developed world is certainly following in the same footsteps. It’s just that migration is masking the issue in some countries and exacerbating it in others.

So, the answer to the question of why you should care about Japan is simple: predictive power – the edge every investor wants. Japan is an extreme and, therefore, insightful example of the change that we face to a slower and lesser extent. It’s our canary in the coal mine when it comes to how demographics will impact investing.

It’s like a lesson someone else had to learn the hard way, but which you can watch and learn from a safe distance because you’ll face much the same challenge eventually. If you pay attention, that is.

So, do you want to wake up one day and discover your prime minister warning that the country is “on the brink of being unable to maintain social functions” because of its ageing demographics? Or do you want to pay attention to Japan’s prime minister when he said so back in January last year?

What happens next in Japan could reveal the future we are in for in the UK and elsewhere.

The only trouble is that Japan is a rather unusual place for a long list of reasons other than demographics and immigration. And it’s an even more difficult place to understand.

What about Japan’s financial and investment trends are driven by demographics and what is just… Japan being Japan?

Untangling the two is the crucial challenge that we face when trying to use Japan’s experience to learn from demographics’ impact on investing.

For example, do Japanese properties decline in value over time because of a lack of housing demand due to demographics or because of the quality of the housing stock?

I don’t know what’s more surprising – the idea that property prices fall in the long run or that Japanese people build poor-quality housing. But, in a nation of earthquakes, not much construction can be expected to stand the test of time. As a result, Japanese people prioritise building cost over quality and longer building lifetimes. Houses are seen as depreciating assets, like cars, with a life of 20–30 years. A few earthquakes, and they’re worthless.

The Japanese stock market is, however, on a tear recently. For the first time in decades, the market is in a sustainable-looking uptrend.

The question is why, given the demographic nightmare Japan faces. If demographics have weighed on Japanese stocks for so long, why are they surging now?

I suspect the answer can be found in the currency – another lesson that UK-based investors need to heed now.

You see, just as the UK did in 1967, when the pound was devalued, and just as the US did in 1971, when the US dollar was devalued against gold, governments can ultimately evade the consequences of their poor economic policies by devaluing money… unless they’re in the eurozone. (In which case they are in deep trouble.)

But it’s not just bad economic policies that a weaker currency helps you escape from. It’s also just bad economic prospects generally, such as demographic decline.

The long winter in Japan’s stock market may reflect poor demographics – there are too many retiree sellers of stocks and not enough buyers of working age. But the consequences of demographic change could equally well play out in Japan’s currency instead.

Indeed, that’s what’s been happening with the crashing yen – one of the big stories of 2023. Of course, a weaker yen is also good for Japanese stocks, hence the surging market there.

After decades of deflation and poor economic performance, Japan has decided to print its way out of trouble at the expense of its currency’s value. Japan even finally has inflation!

Based on this, we can expect the currencies of countries with struggling demographics to lag behind those with good demographics. This is good news for the pound and the US dollar, thanks to their good demographics… but probably bad news for the UK stock market.

Inside the eurozone, where countries cannot devalue their currencies, things get especially interesting. Governments must fix their poor economic policies, get a bailout, undergo true austerity, or experience some sort of crisis instead of asking the exchange rate to do the heavy lifting. This is why countries like Italy and Greece struggle so much. They used to rely on devaluations to remain competitive.

The eurozone’s incomplete expansion across the EU is why you might expect demographically similar countries in Europe, which face the same demographic challenges in the future, to perform very differently economically based on whether they are using the euro or not.

If a country uses the euro and cannot devalue it, they will have to experience a depression like Greece. If they can devalue their currency, a lot of the economic pain may be spared, at the expense of those who save in local money.

Thus, the fate of Eastern Europe will be divided by their currencies, I expect.

What else can we learn from Japan’s demographic disaster?

Well, next month, the Hubble family will move back to Japan for about eight months. Assuming our home there is still standing, it’s about a three-hour drive from the epicentre of the recent earthquake.

Sure enough, we’ll also be landing at Haneda Airport, where the recent flight disaster was. And we’ll be travelling on the same airline too…

If we make it out alive, you can expect to hear plenty more about the investment environment of the UK’s demographic future this year.

And subscribers to The Fleet Street Letter will learn whether the Japanese stock market is still a buy or not, given its recent boom.

Until next time,

Nick Hubble
Editor, Fortune & Freedom