Japan

We know nappies and haircuts are strange topics to be writing about. However, both are relevant to our story about Japan’s ageing population and the impact this is having on the economy.

From a demographic perspective Japan is facing a large population decline. Deaths are now running well ahead of births.

Japanese birth rate vs mortality rate per 1000 people

Source: World Bank, 2017. Birth/Death rate indicates the number of live births/deaths occurring during the year, per 1,000 population

If this trend continues, at its current rate, the population will fall from around 126m to 87m by 2060. Furthermore, segmenting the data by age brackets, 28.1% of the population are currently above the age of sixty-five. To put this into context, the figure for the over 65 age range in the UK is 19%.*

An ageing population carries economic implications. This manifests in different ways. One of the stranger examples is the emergence of a rare statistical quirk connected with sales of children’s nappies.

In 2013, children’s nappy sales in Japan were overtaken in volume terms by sales of adult diapers. This presented a revised business opportunity for consumer product companies because adult diapers sell at higher price points. However, it also highlighted the extent to which an ageing population was beginning to impact society. It made the demographic trend discussed by actuaries appear more real to ordinary citizens, especially on social media where the statistic went viral.

What became apparent is that faster sales of higher priced items for an ageing adult segment of the economy isn’t particularly helpful. It does nothing to pull an economy back from falling into a disinflationary abyss. The fact is that Japan’s ageing population makes it extremely difficult for policy makers because older people save more and consume less. This makes the objective of generating inflation necessary as Japan’s policy makers are on a mission to force cautious older savers out of their cash holdings. They intend doing this by eroding the real value of their deposits.

Japanese Inflation (CPI)

Source: Bloomberg, data as of August 2018

Undeterred by the difficulty of this task Japan’s prime minister, Shinzo Abe, has put inflation at the centre of economic policy. To date he has met with limited success (depicted in the inflation chart above). The headwinds are proving very hard to overcome, probably more so than could have been anticipated. However, there may be a straw in the wind – ‘cost push’ inflation. Starting from February 2019 the price of a Y1,000 (£7) haircut in Japan is going to cost more. Quite a lot more in fact. The cheap, no frills, 10-minute haircut proposition, rolled out over a decade ago by QB House, is about to see the price rise to Y1,200. This one-step shift is about to herald a percentage increase of more than 11%.

Of course, it is a stretch to suggest that one example reflects a broader trend. Extrapolating from an anecdote may be wholly misleading, but QB point to the need to put up prices. This is needed to cover increased wages to retain and recruit skilled staff. There are reports that this is also happening in restaurants and other service businesses across Japan. In many cases businesses are putting up wages to attract a wider pool of labour. The higher input costs are then ‘pushed’ along to the end consumer.

We do not know if the price signal from QB House is as distinctive as the 2013 population decline signal from higher sales of adult diapers. However, in the connected world of economics a signal can be more effective for spotting and identifying a trend than listening to a lot of noise.

*Source: World Bank

US and Mexico

This week, relations between the US and Mexico reached a high point after a new bilateral trade agreement was signed by the two nations. This agreement involved a compromise on autos, labour rules and some additional provisions.

In the build-up to the US election and after the post – election result, relations between Donald Trump and Mexico soured with Trump looking to plug the $58bn overall trade deficit (the US importing more goods than it exports) it had with Mexico. This started when President Trump signed an executive order to build a wall running across the Mexican border to control illegal immigration and expected Mexico to pick up the estimated $8bn bill. Furthermore, Trump warned of high tariffs to be placed on car manufacturers if they did not move jobs and production back to the US from Mexico. Clearly relations had become fragile.

The preliminary deal has seen the North America Free Trade Agreement (NAFTA) updated, although the third member, Canada, has recently been excluded from the party. The US and Mexico agreed that 75% of a product must be formed in either of the two countries to receive tax-free treatment, a 12.5% increase. In addition, both nations will require 40% to 45% of each vehicle to be made by workers that earn at least $16 per hour in order to repel manufactures looking to exploit low paid Mexicans.

The new agreement moves the United States closer towards the type of agreements that were already in place before Trump became President. This is another example of his ‘provoke’ then ‘negotiate’ tactic which was used with Europe and to an extent China. With trade agreements between the US and Mexico almost settled, Trump can concentrate on China, a much bigger battle worth fighting with a $375bn trade deficit, highlighted by the chart below.

US Trade Deficit

Source: Bloomberg, August 2018

If Mexico are sitting upfront with the US and China is on the horizon, where does this leave Canada? In the back! Canada will most likely have to offer concessions in order to resume talks with the US. Trump, using the rules from his very own negotiating bible (“The Art of The Deal”) freezed Canada out and threatened the termination of the current NAFTA agreement which would see tariffs placed on imports from Canada in order to shrink its current £17.6bn deficit.

Following the announcement on Monday US stock markets, global currencies and commodities all rallied with investors more at ease given the growing trade tariff rhetoric. If Trump can finalise an agreement with Canada and Mexico it may be politically savvy move with the November mid-terms around the corner.

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