Monday, January 07, 2013

A Spot Perhaps Not So Sweet

I heard a version of Jesper Koll's Japan bull speech


in December.

Here is my biggest problem with it.

At 4:34 in the video, Koll shows a graph of the wages and bonuses a typical salaried worker receives over his or her lifetime. Wages remain low over the first 15 years of work, then rise rapidly, reach a peak at around 55 years of age, whereupon they decline until retirement.

According to Koll, the passage of the "Mick Jagger" generation (Jagger was born in 1943) from its wage peak and into wage decline and retirement accounts for 80% of observed deflation. One has to assume he is talking about consumer prices deflation. He is clearly not talking about deflation in real estate -- that he accounts for differently. He does not even mention deflation in equities, an interesting choice given his day job.

According to Koll, the massive deflationary pressure from declining wages and bonuses will reverse as the children of the Mick Jagger generation enter their high wage post-40 years of age period.

Ummm, cannot say that I agree.

On the first of this month, the Ministry of Health, Labour and Welfare released this graph.

Let us look first at the top solid line.


In 1949, births topped out at a never-to-be-seen again 2,678,792. They fell precipitously, bottoming out at 1,566,713 in 1957 -- a 42% drop in just 12 years' time. Births recovered as the Mick Jagger generation began having children, peaking at 2,091,983 in 1973 (note - half of this generation have already entered the stage when their earnings accelerate). This new peak of births is 32% smaller than the 1949 peak.

After 1973, births fell slightly less precipitously than after 1949, hitting 1,431,577 in 1985 -- a 12 year fall of 32%. However, unlike in 1957, births have never recovered. Births have fallen slowly but steadily, declining 38% over the last 27 years, falling below the number of deaths (thick dotted line) in 2007.

So what does all this mean?

a) the numerically largest generation ever is leaving the workforce.

b) a numerically large generation is entering its high-wage period. However, their numbers are only around 75% of the generation whose total earning power they are supposed to be replacing.

c) there are dramatically fewer children and young people to serve as consumers and workers. Good for them on an individual level as they will (in theory!) be able to bid up wages and demand lower prices for goods. Bad for the country in terms of aggregate spending.

d) With births below replacement level, total population -- i.e., total consumption -- is going down and at an accelerating rate, the number of deaths over birth rising from 18,516 in 2007 to 210,000 last year.

Koll is probably right about a boom coming on. However, it is for the folks selling investments and savings vehicles to the echo generation. That generation has to plan for lifespans of 90 years and for taking care of elderly parents for two decades before falling themselves into decrepitude -- all with little help from whatever survives of the national pension system.

A surge in spending due to rising wages and bonuses? The birth and death numbers do not offer solace.

And no no one in the Diet is losing much sleep over the implications of the above graph. To borrow a simile from Chris Rock, statistics and macro are like kryptonite to this blessed land's parliamentarians.


Chris ( said...

Oh Jesper, I don't think I've known a time when you weren't a bull on Japan...

The healthcare opportunity is specious given that the largest customer of the healthcare industry (the government) is bankrupt. Doubling nurse pay, as attractive and fair as it sounds, simply isn't on the cards.

The same goes for land reform. Perfectly reasonable in theory, yet (by definition) requires land consolidation and a net drop in human capital employed - neither of which are politically credible.

And as for the likelihood of the declining cohort of young people in Japan being able to leverage their position to demand higher wages? I'd happily take the other side of that bet any day.

The frustrating thing about Japan is not that the problems are intractable and without solution. The frustration lies in that of the myriad great ideas, none ever get implemented.

MTC said...

Chris -

Agree with all your points.

What goes for nurses goes for eldercare workers and childcare workers -- all of whom are needed, all of whom are in demand, all of whom are underpaid.

Here is a policy conundrum that needs to be explained to the voters. The symptoms -- folks going through the training then not working in the field; understaffed hospitals and rest homes -- are well-known. The causes, however, are left to the imagination.