US Asian Headache: Japan Is Shrinking!

And Next South Korea!

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 demographics of Japan are absolutely horrendous, from January to April 2024 there were 230,014 live births and 568,797 deaths, a deficit of 333,783 and a natural demographic decline rate of 1 million per year. And the 2024 numbers were a deterioration from 2023, a trend that looks set to continue in future years; the natural rate of decline will intensify. Japan has tried a number of policies to stop the decline in births but all of these are superficial, they do not address the two biggest probable reasons (i) the turn to neoliberalism from the 1990s and the resulting precarity of much of the younger workers (ii) the ongoing misogyny of Japanese society. When I visited Japan in the mid 2000’s I watched a Japanese program on marriages involving foreign spouses, interestingly all of the Japanese women were happy with their foreign husbands while all the foreign wives were very unhappy with their Japanese husbands. Both uncertain future economic prospects and a much greater resistance to misogyny has made the “marriage and motherhood package” much less alluring to Japanese women.

Under strong US pressure and economic aggression, together with the Western loving and selfish economists of the Bank of Japan who intentionally created a huge financial bubble and crashed it and then inhibited the recovery from it, the country dismantled the very development state that had been responsible for its post-WW2 miracle growth era. Instead of a development state, neoliberalism was widely implemented from the late 1990s onwards. The documentary below covers the successful drive of the BoJ mandarins to wrest control away from the developmental state, without any thought of the cost to the average Japanese citizen. A woeful story that points to the need for central banks to never be independent, but rather fully subservient to the state; otherwise they simply become the tools of the financiers and foreign interests.

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.

The end result has been a significant decline in real living standards of the younger generations, and an increase in the instability of employment that greatly reduces the levels of confidence in the future that many require to think of having children. A problem affecting all Western neoliberalized economies, but greatly intensified in a highly homogeneous Japan with low levels of immigration; as 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:

Then we also have the disconnect created by a society that has made getting a good job much harder for men, creating depression and a lack of drive in many, while women who have had increasing job prospects still wait for “strong” men to approach them; a disconnect between culture and genetic dispositions. In Japan these unassertive men are known as “herbivores”.

The demographic impact is a society where the rate of population decline is accelerating toward 1% per year and above (10% a decade!); 1.2 million per year out of a population of 120 million. And of course that reduction is heavily concentrated in the younger generations versus the older generations: creating an increasing labour shortage. With the big corporations (and Japanese and international financiers) now in charge of the state, rather than the state acting as a driver of general development as in the post-WW2 years, the answer is attempts to increase immigrant labour. But in such a homogeneous nation with no history of significant immigration these attempts have met with stern resistance. Also, the Japanese language and culture act as very significant barriers to new immigrants; not helped by Japan’s new nationalism and militarism.

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.

With a still relatively high GDP per capita of US$33,800 at current exchange rates and US$54,000 at purchasing power parity (PPP), this industrial decline leaves a very limited ability for Japan to offset its population decline rate with increases in per capita output. Especially when the decline is concentrated in its working age population. This is very different to a China that has a very large population of 15-34 year-olds who will be travelling through their years of increased proficiency and output in the next two decades. Its fall in birth rates is relatively recent, and it has a significantly lower GDP per capita; with 5% GDP growth rates looking achievable for at least a decade or more (doubling every 14.5 years). The Chinese median age is currently 39, while it is 50 in Japan (and 45 in South Korea, see below).

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.

From a low of 102.88 to the US$ in late 2020, the Yen had depreciated to a high of 161.27 to the US$ in April 2024 (a near one third devaluation), substantially due to the US rise in interest rates while the Bank of Japan was limited in its ability to raise interest rates given the massive levels of Japanese indebtedness. In the same period, Japanese benchmark interest rates have moved from 0.015% to just over 1.05%; a move that in itself 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.

The risk is that domestic inflation reduces domestic incomes, driving consumers to cut back; as has recently been seen with 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, 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 women, 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

Japan may also be harbinger of what is to become of South Korea with its own population decline and turn to neoliberalism after the 1997 Asia Financial Crisis, and a pointer to the fundamental weakness of the US position in Asia with respect to China. We are now seeing reports such as this below, with an average of only 0.68 children being born for each South Korean women (far below the Japanese level of 1.2); the natural replacement rate at which the population remains stable is 2.1.

As with Japan, given the brutal Chinese competition and its already high GDP per capita of US$33,000 at market interest rates and US$59,000 at purchasing power parity, there is a very restricted ability for the nation to offset working-age population decline with increases in GDP per capita. Even more than Japan, South Korean industry is concentrated in areas wide open to Chinese competition, such as car manufacturing (Hyundai and Kia), electric batteries (LG Energy, Samsung SDI and SK On), steel (POSCO), and electronics (Samsung, LG, SK Hynix). Its car industry, with its exports predominantly dependent on the now protected US market (although exposed in Canada, Australia and the UK) may have a better chance of withstanding Chinese competition; 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.

In 2023 South Korean GDP grew only 1.36% vs. 5.2% for China; with its population already falling at a rate of 0.25% and set to accelerate downwards rapidly. As a side note, North Korea has an extremely healthy demographics with a very young population which is still growing and could provide a well educated workforce for a Chinese-enabled rapid economic development; aided by the recent rapprochement between Russia and North Korea. 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?

So the US’ two main partners vassals in Asia will most probably be in decline (Japan) and struggling to grow respectively before it goes into rapid decline (South Korea), while faced with a China with an economy still growing at a rate of about 5% (doubling every 14.5 years). Countries with fast declining working-age populations will also be loath to fight China to the last <insert US vassal population here>, as will be the Taiwanese.

Philippines to the Rescue of Empire?

The Chinese leadership know that time is on their side, and that is why they have striven to maintain a peaceful rise. Their Western opponents understand this reality to some degree, and that is why their desperation to limit China’s rise and even trigger some kind of military conflict becomes greater and greater. As the US has found the majority of ASEAN and India unwilling to sacrifice themselves for the good of the US Empire, it has found a new vassal in the incoming president of The Philippines; a man with a good vassal education at a private boys school in England, Oxford and Wharton, and a father who was the US-vassal dictator from 1965 to 1986. The Philippines is a poor nation of 115 million though, with a GDP per capita of US$3,500 at market exchange rates (China US$12,600) and US$9,700 (China US$24,500) at purchasing power parity.

The Philippines main industries are basic electronic component manufacturing/assembly, food manufacturing, agribusiness, mining and other resource extraction, and textile manufacturing; Vietnam has already shot past the Philippines in value-added manufacturing exports. As 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

Instead of focusing on superficial incentives for women to have more children, the Chinese Party-state is focusing on the basic cost of living, especially housing costs. From the mid-2010s Party-state policy turned toward taking the air out of the Chinese housing bubble that had made houses so expensive relative to incomes, and stepped in hard in 2020 to create a property bubble bust. as the New York Times put it “It was the first test of Beijing’s determination to wean China’s economy off its decades-long dependence on building and construction to sustain the economy”. The company Evergrande was seen as the poster-child for the excesses, threatening a systemic financial crisis. But with the heavily Party-state control financial system and fully controlled central bank, its implosion has been managed with finesse. The fall in house prices will be managed, as the state steps in to turn empty properties into state rentals and buy some of them up to hold off market when required; it will not be allowed to create a larger financial crisis. And to rebalance the economy away from property investment and toward greater technology innovation and productivity; as Bloomberg reports:

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 analysis from 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.