01 Will Japan Eventually "Disappear"?

This year, Japan has frequently made global headlines due to the continuous devaluation of the yen. Additionally, the world's first Musk has warned about the decrease in Japan's population: without change, "Japan will eventually cease to exist"!

Japan can be said to be in a state of dire straits at present!

Looking at the yen, it has been devaluing all year, reaching its lowest level since 1972, once breaking the 1 US dollar to 150 yen mark. What was the data at the beginning of the year? It was 1 US dollar to 100 yen, which directly devalued by over 30%. This rate of decline is even faster than the ruble, which is battered by the war in neighboring Russia!

The yen's depreciation not only exceeds that of developed economies' currencies such as the euro and the pound, but also far surpasses the won, Indian rupee, and Thai baht, and other emerging market currencies in Asia. Moreover, the Chinese yuan continues to be at a high level of over 20 against the yen. Originally, we needed more than seven yuan to exchange for 100 yen, but now it only takes five yuan. This rate of decline is indeed rapid!

So, what are the reasons for the continuous devaluation of the yen?

Advertisement

On the surface, Japan's monetary policy is at odds with the interest rate hike cycle led by the United States, and the trade situation has significantly deteriorated, which are the direct causes of the yen's devaluation. As we all know, this year, the Federal Reserve's aggressive interest rate hikes have caused the depreciation of currencies other than the US dollar. But why has the yen devalued so wildly? Fundamentally, the structural malaise of the Japanese economy is the deep-seated reason for the yen's devaluation.

What problems will devaluation cause? Looking at the GDP, Japan's nominal GDP valued in US dollars is declining.

According to the latest forecast by the Organization for Economic Cooperation and Development (OECD), in 2022, Japan's nominal GDP is 553 trillion yen. If converted at an exchange rate of 1 US dollar to 140 yen, then in 2022, Japan's GDP will only be 3.9 trillion US dollars, breaking through the 4 trillion US dollar mark!

3.9 trillion US dollars, what does this mean? This means that for the first time in 29 years since 1992, Japan's GDP has fallen below 4 trillion US dollars, which is to say, Japan's GDP has regressed back to the level at the beginning of the 1990s, at the time when the bubble economy burst!On the one hand, there is the Japanese economy, which is continuing to decline behind the depreciation of the yen, and on the other hand, there is the crisis brought about by population issues!

The words of the world's richest man, Musk, are not unreasonable, after all, everyone knows that Japan is currently facing a severe population problem, with a low birth rate and an aging population!

Since 2008, Japan's population has experienced a negative growth for 12 consecutive years, with the total population decreasing from a peak of 128 million to 125 million, which is not even as many as the population of Guangdong Province in our country.

In addition to not having children, Japan is also facing a very serious issue of population aging. In 2021, the proportion of the population aged 65 and over in Japan reached 29.1%, setting a historical record. We have already discussed the importance of the population, especially the labor force, in our previous articles.

A major reason for the continuous decline of the Japanese economy is the significant drop in the labor force population. Now, the retirement age has been postponed to 70 years old, and even elderly people over 75 years old are still working and laboring. Moreover, the pressure of elderly care in Japan is also very great!

The above two issues, the depreciation of the yen and the population problem, are huge challenges faced by the Japanese economy!

02 The End of the Economic Bubble

However, we have also found that even if the Japanese economy continues to decline, Japan is still the third largest economy in the world, only behind China and the United States.

So, what is the reason? In fact, their foundation is too strong! The continuous depreciation of the yen, the population problem, and the decline of the Japanese economy all have to be traced back to 30 years ago in Japan.

Let's review what has happened in Japan over the past 30 years, from its former glory to the current economic warning.1) Is the Plaza Accord the real culprit?

Here, there is a significant event, the Plaza Accord, because the mainstream view is that it was the Plaza Accord that pushed Japan into an economic crisis. Let's examine what happened to the Japanese economy before and after the Plaza Accord.

The clock ticks back to the 1980s. Post-World War II Japan, with the help of its ally the United States, saw its economy soar. Focusing its efforts on major initiatives, Japan relied on selling automobiles and their top-tier electronic products to secure a substantial trade surplus on the international stage each year. For a time, Japanese-made products flooded the global market!

At this juncture, Western developed countries faced a situation of stagflation, with the economy in a slump. The United States experienced a dramatic increase in fiscal and trade deficits, known as the "twin deficits." Look at that, Japan's massive trade surplus was causing discomfort for the United States. This Japan, which had been propped up by its American big brother, was not only making money from the United States but also causing a trade deficit for the U.S. Could America tolerate this? Absolutely not!

Consequently, the United States made a bold move, enlisting the United Kingdom, France, Germany, and Japan to sign an agreement that would devalue the dollar and appreciate your currencies, thereby increasing American exports and improving the balance of payments. The famous Plaza Accord emerged.

After the agreement was signed, the five nations jointly sold dollars, creating an atmosphere of dollar devaluation in the market. Among these, the yen's change against the dollar was the most significant. In September 1985, 1 US dollar was exchanged for 250 yen, and three months later, the dollar fell to 1 US dollar for 200 yen. Thereafter, the dollar continued to decline against the yen, reaching its lowest point at 120 yen three years later.

This operation, with the yen appreciating significantly, was actually the beginning of Japan's bubble economy nightmare, yet Japan was oblivious at the time!

Japan went on a spending spree, with real estate, stocks, and various other sectors experiencing wild appreciation. Japan experienced the feeling of "getting rich overnight." During that era, Japan's unimaginable prosperity and a life of extravagance and indulgence led them to a culture of luxury.

At the same time, Japan also increased its foreign investment efforts, especially in the United States. The Japanese went on a buying spree in the U.S., acquiring high-end residences, luxury hotels, golf courses, and businesses. The Rockefeller Center and the Empire State Building, once symbols of America, were successively purchased by Japan. Even tour groups discussed whether to buy a few buildings or the entire lot. In New York's luxury stores, wherever the Japanese went, they cleaned out the shelves. When a Japanese person expressed a desire to buy the Statue of Liberty, a saying circulated in the United States: "Japan is buying up America." By the end of the 1980s, 10% of American real estate had been purchased by the Japanese.

However, we say that when God wants you to perish, He first makes you mad, and the notion of buying up America also marked the beginning of Japan's nightmare!After the Plaza Accord, although the United States did not fundamentally solve the problem and continued to maintain a situation of debt and deficits, it did achieve the desired outcome, namely the devaluation of the dollar, which improved the balance of payments and alleviated the pressure of the twin deficits.

As for Japan, at the beginning, there was no significant effect. Japanese goods exports continued to surge forward almost unaffected. The main reason was that the Japanese economy had experienced more than 20 years of rapid growth, followed by moderate growth, possessing considerable competitiveness and having achieved "growth inertia," which would not drop all at once.

Secondly, at that time, the costs of Japan's manufacturing industry (such as wages) were still lower than those in the United States. Coupled with Japanese manufacturers' efforts to reduce costs, they were able to overcome the difficulties caused by the appreciation of the exchange rate.

Thirdly, in the 1980s, Japan had reached its peak in the manufacturing sector, with considerable advantages in areas such as automobiles, home appliances, electronics, machinery, and chemicals.

Lastly, at that time, Japan's main competitors were the mainstream Western economies, such as the United States and West Germany. The emerging industrialized economies had not yet emerged (such as the Four Asian Tigers), and Japan, with its cost advantage, could capture a larger market share, especially in exports to the Asian region.

2) The essence of the bubble economy is excessive investment in the stock market and real estate.

So where did the problem lie? We need to see through the appearance to the essence!

I was sent to study in Japan in the fall of 1988, catching the tail end of the most brilliant period of the Japanese economy. For a period after the Plaza Accord, including the late 1980s and early 1990s, there was no sense of crisis in Japan, which can be described as a time of peace and prosperity.

Someone must ask, didn't the bubble burst in 1991? Indeed, 1989-1991 was the peak of the Japanese economy, but it also implied the danger of the bubble bursting.

In fact, at this time, the Japanese economy was already two-layered, one layer was normal economic activity, and the other layer was the asset (real estate and stock) bubble.Asset bubbles can burst at any time, but another layer will not immediately encounter problems; that was the reality at the time. Even after the bubble burst, people's work and life were not directly affected; only those enterprises and individuals focused on investment were hit. Since the vast majority of Japanese people work in companies or corporations as salaried employees, as long as these companies and corporations exist, their livelihoods are secured.

Moreover, ordinary Japanese people are not keen on "stock trading," and the securities market, as a form of direct finance, is not mainstream. Only a few enterprises and individuals specialize in this work, which is different from China and the United States. Even if they hold stocks, they tend to hold them for the long term!

In essence, the bubble economy was caused by an excessive amount of capital (from enterprises and foreign investment) flowing into the stock market and real estate, leading to artificial increases in stock prices and land values. Within just two years, Japan's average stock index tripled, and land prices nearly doubled. The more they rose, the more people bought, leading to increasing leverage and an ever-growing bubble. Everyone was only concerned with buying, without any regard for debt. At its peak, Japan, with a land area only 4% of the United States, had land prices four times that of the entire United States.

Previously, Japan focused on the real economy, but now it has shifted towards the virtual economy. Until one day, when conflicts in the Middle East caused oil prices to soar, Japan faced a very serious inflation, a situation that was ultimately unsustainable.

Japan slammed on the brakes, pulling back all the liquidity. As a result, Japan ushered in an unprecedented tightening policy, drastically reducing bank loans. Both stock traders and homebuyers suddenly found themselves unable to obtain funds, leading to a frantic sell-off of their properties and stocks. The stock and real estate markets both plummeted, with a drop exceeding 40%! This led to the bursting of the bubble.

What was terrifying was that, with mortgages still in place, the burden of repaying loans became overwhelming in the face of economic stagnation and shrinking incomes. At this point, it was already too late to develop core technologies. From then on, Japan has remained in a state of stagnation!

3) The difficulty in rescuing the Japanese economy

However, as we mentioned earlier, even after losing three decades, Japan could still rely on its old foundations of selling cars, electronic products, and light industrial goods to remain the third-largest economy. But this year, undoubtedly, presents another significant challenge for Japan!

With the depreciation of the yen, according to the latest forecast from the Organisation for Economic Co-operation and Development (OECD), Japan's GDP in 2022 may fall behind Germany, dropping to fourth place.

At the same time, data also shows that, in U.S. dollar terms, the Nikkei average index has fallen by 20% this year, and the average wage of Japanese people has regressed to levels from 30 years ago. This has already begun to reduce Japan's purchasing power and attractiveness to talent.What's more worrying is that the situation may get worse in the future, as the yen will continue to depreciate, and it seems that the depreciation of the yen is already very difficult to stimulate the Japanese economy. And the population issue will also become more severe!

So, how can Japan save its economy? In this regard, Japanese experts have warned that the depreciation of the yen will lead to a decline in Japan's national strength, and it will also be difficult to attract talent from abroad, which will ultimately hinder economic growth.

Therefore, Japan urgently needs to transform, based on industries with high added value, and shift to an economic structure where wages rise and the currency strengthens. This has become an urgent task for Japan. However, it may not be so easy to achieve, even though it is easy to say!