MW-29 -- Then there is the Population Crunch

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Weekly Financial Commentary from Tokyo

Issue No. 29
Tuesday, May 27, 2003

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Viewpoint: Then there is the Population Crunch

The Bottom Line:

o Let's optimistically assume that Japan is able, by some
extremely fortuitous combination of government policy,
private-sector initiative and adroit central bank monetary
manipulations, to avoid a depression and/or a financial
crisis. The nation can then look forward to a population

o Somewhere around 2006, Japan's population will peak and begin
to decline. By the year 2050, according to the latest Japanese
government estimates, one-third of the population will be
above retirement age, and the overall population will have
dropped by 27 million people. The social and economic
implications are enormous.

o Japan's looming demographic crunch has long been on the
horizon. But now the negative effects of this crunch are
beginning to emerge. Population pressures will continue to sap
economic activity even if Japan shakes off its deep banking
crisis and the crippling bout of price deflation.

o On paper, the seniors market sounds like a new growth segment
in a stagnant economy. But developing this market is turning
out to be an uphill slog. The bottom line is that many of
these companies cannot stand by themselves in the market
economy for a number of reasons.

o At the end of the day, a lot of "outside the box" thinking
will be required to figure out how companies can make a buck
in the new seniors market. More government subsidies and
support are not required. Money Watch suspects that the
bureaucratic "administrative guidance" approach taken
heretofore to health care and other seniors markets only
encourages more graft and systemic corruption at the expense
of the users of the services -- the seniors themselves.


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Then there is the Population Crunch
Japan's Growing Seniors Market: New Growth Area or Playground for
Rip-off Artists?

While Money Watch does not in principle consider itself a forecaster
of doom and gloom, the litany of ridiculous and self-serving
"countermeasures" that emanate from Japan's policy makers in the face
of what may be the most serious malaise that Japan has faced since the
Showa Depression leaves us with no choice. To illustrate a recent
example, Hideyuki Aizawa, who heads a special Liberal Democratic Party
committee on fighting deflation, recently claimed in a TV interview
that if the government adopts the ruling coalition's package of
"emergency" stock-market support measures (read let's reverse the
painful reform measures that the Koizumi administration is trying to
implement), the Nikkei 225 could rise above 10,000. Such comments
illustrate that entrenched politicians resistant to change are still
laboring under what have now become dangerously irresponsible
misconceptions about the Japan malaise.

Of course, there are those who argue quite convincingly that
collapsing asset markets are the cause, not the result of many of
Japan's problems. According to Takahiro Miyao of the Japanese
Institute of Global Communications and Richard Koo of the Nomura
Research Institute, stimulation should precede the consolidation
resulting from reforms. According to their explanation, the Japanese
economy is inflicted with two illnesses -- one is "pneumonia" and the
other is "diabetes," so to speak. They claim that Japan should place
its priority on treating "pneumonia" (i.e., asset deflation) first to
save the patient's life first and then deal with "diabetes"
(structural inefficiencies and nonperforming loans) later. Conversely,
the Koizumi government is trying to treat diabetes. In their view, the
administration has no recognition of the fact that Japan's economy is
dying of pneumonia, which should be regarded as the fundamental cause
of the current economic malaise. However, Money Watch worries that
those resisting meaningful change in Japan are seizing this approach
to turn back the clock on reforms, while in reality BOTH reforms and
reflation need to be pursued in a manner that has the Bank of Japan,
the Koizumi administration and the bureaucrats singing off the same
song sheet policy-wise. The singular focus on one at the expense of
the other presents its own set of risks and potential for failure.

Tremendously Negative Demographic Influence
Moreover, both ignore the tremendously negative medium-term
demographic picture in Japan. Let's optimistically assume that Japan
is able, by some extremely fortuitous combination of government
policy, private sector initiative and adroit central bank monetary
manipulations, to avoid a depression and/or a financial crisis. It
then will have to face a population crunch. Money Watch hesitates to
use the word "crisis," because crisis has become a very abused noun to
describe Japan's problems these days (the IMF, however, terms it a
"demographic crisis," a phrase echoed by the Central Intelligence
Agency in its report of world population). Somewhere around 2006,
Japan's population will peak and begin to decline. By the year 2050,
according to the latest Japanese government estimates, one-third of
the population will be above retirement age, and the overall
population will have dropped by 27 million people. The social and
economic implications are enormous. The first symptom of a falling
population is that the work force gets older. As the work force ages,
its productivity increases, as do its savings. Thus, in this first
stage, you have a "virtuous circle" for investment markets in which
interest rates fall and stock prices rise in parabolic fashion.

Unfortunately, Japan has already gone through this phase. As the
population keeps aging and falling in numbers, the ratio of retirees
to workers rises, and you get dramatically falling demand across the
board. This produces a vicious circle of economic contraction, excess
capacity, falling profits and falling stock prices. A falling
population is deflationary, but it is not the "deflation" currently
being referred to by government policy makers nor by most market
watchers, which is a temporary state of affairs that includes moderate
economic growth, falling real wages and rising corporate profits. The
problem is, with a falling population, you need rapidly rising real
wages (productivity increases) across the economic spectrum in order
to have any economic growth at all. Given stable wage rates and stable
prices, you still have structural recession and business contraction.
For investors, it will feel like a nuclear winter of falling demand,
falling real interest rates and rising credit risk, as companies
default and go bankrupt in the general contraction of demand (sound

As Japan's demographic crunch accelerates, Japan will face
substantially greater fiscal challenges than it is already facing. In
addition, the resulting reduction in potential output growth will
limit increases in economic welfare at a time when they are needed
more than ever. Japan's demographics imply that the level of real GDP
(on IMF estimates) will fall by a cumulative 20 percent over the next
century compared to a scenario where its population remained
stationary. These demographic changes will be most pronounced between
2025 and 2075, where the output cost of aging will reach almost half
of 1 percentage point in lower annual GDP growth between 2025 and
2075. The Keidanren has gone so far as to suggest that a VAT hike to 8
percent would be needed to offset the negative impact on government
tax revenues by the year 2025, a move that would undoubtedly
exacerbate the downward pressure on already shrinking consumption.

Negative Symptoms Already Visible
Japan's looming demographic crunch has long been on the horizon, but
it is generally believed to be some way off in the future. But the
negative effects of Japan's population crunch are already beginning to
emerge. Until recently, baby boomer households in Japan have supported
consumption. Between 1980 and 2000, those born between 1941 and 1955
formed 7 million standard, nuclear households that spent an average of
4 million yen per year on consumption and collectively accounted for
28 trillion yen a year in personal consumption. In 1970, there were
2.34 million households headed by those aged between 35-39, but by the
year 2000, this had decreased to 1.85 million. Not only are households
of the younger generation smaller, but they are marrying later or not
at all.

Thus Japan's aging society problem is not only a matter of the future,
but also of the present. Moreover, population pressures will continue
to sap economic activity even if Japan shakes off its deep banking
crisis and the crippling bout of price deflation. Rather than the boon
it was once considered, the high propensity to save has exerted steady
downward pressure on consumption over the past 10 years, interrupted
only temporarily by a blip in 1996 ahead of an impending increase in
the sales tax. By the same token, sagging private consumption, well
over 50 percent of gross domestic product, has in turn hobbled real
GDP growth to an average of just 1.05 percent a year over the past 10

The dramatic implications of demographic change are even affecting the
behavior of young Japanese. They are increasingly boycotting their
obligatory national pension payments. They too see that demographics
are working against their future pension benefits. In 2002 there were
3.6 Japanese between 20 and 64 to support each person over age 65. By
2025, the ratio will fall to just 1.9, and it will still be declining.
In other words, today's generation pays premiums to keep their retired
elders in relative comfort, while they can expect far less when they
retire. To younger Japanese workers, the image of the pension system
is that it's just throwing money away, especially when they read how
it consistently loses trillions of yen on the funds that are invested
in the markets.

For Japanese manufacturing corporations, a strong yen and relatively
expensive labor are not the only factors driving them out of Japan.
The country's top carmakers, Toyota, Honda and Nissan, haven't opened
an assembly plant in Japan for over a decade and are shifting their
focus to the US and Asia, where populations are expected to keep
growing. Japanese videogame maker Sega, facing a shrinking youth
market at home, is putting more emphasis on sports games popular in
the US.

Population shifts and investments based on previously misguided
projections about population growth have gotten railway companies in
trouble. The "Tsukuba Express" (operated by the Shutoken Shin Toshi
Tetsudo) between Tokyo's Akihabara and Ibaragi Prefecture is due to be
completed in 2005. But passenger demand projections have already been
revised down by 20 percent, meaning that projected revenues are
already off the mark, making profitable operations all the more iffy
even before railway services start. The bulk of funding for the
venture is provided by three prefectures and the Tokyo metropolitan
government, i.e., taxpayer money, with 11 percent of total funds being
supplied by private companies. The railway was built at a cost of 1.5
trillion yen and was to have supported a network of new "bed town"
communities similar to that of Tama New Town in western Tokyo. When
first planned in 1991, projected demand in the first five years was to
reach 580,000 people. This was first revised down to 380,000 and again
to 290,000 people. The main reason for the downward revisions is
adverse demographic trends that were not considered in the original

In southern Japan, Kyohan railway's total passenger traffic in 1991
peaked at 420 million per year, but by 2001 it had shrunk to 320
million, or back to 1960 levels. Populations in the four major cities
that the line services have dropped 7 percent, or by 50,000 people,
over the past 10 years. The "hollowing out" of local factories being
transferred to Asia has only exacerbated the already adverse
demographics. This is not an isolated example. All 20 JR and private
railway lines in the Osaka area have seen average traffic decline by 5
percent below 1975 levels.

Conversely, the private railway firms since their establishment have
used a business model that assumes constant population increases and
have expanded their lines and invested in rolling stock on that
assumption. Given population decreases, their business model becomes
flawed, an observation that has not gone unnoticed by foreign credit
agencies, which have dropped the credit rating of these railways to
speculative grade ratings.

As Japan was in the midst of an "economic miracle," its population was
still relatively young, real wages were rising, and there was,
comparatively speaking, a relatively small wage gap between the haves
and the have-nots. Domestic businesses mainly focused on the mass
markets, and at the same time they depended on consistent price hikes
to produce revenue increases, rather than generating profits through
productivity increases. Demographically speaking, the focus during
Japan's high-growth period was on younger consumers and newly forming

The favorable demographic effects on asset markets from maturing baby
boomers and a growing middle-aged population is well documented in the
US and seen as a major factor in the 1990s bull market. Economically
speaking, a rising middle-aged population leads to increased demand,
driving up asset returns in the short term. However, the effect of a
noticeable increase in the old-aged population is the opposite.
Studies on the asset market effect of retiring baby boomers in the US
show that fund outflows from the stock market are positively
correlated with changes in the fraction of people 65 years or older.
(For an example of such a study, please visit

Both consumer service providers and financial institutions, seeing the
huge reserve of personal financial assets that has already peaked out
at over 1,400 quadrillion yen and is now declining by several
percentage points a year, have been trying to attract this money into
new financial products with only limited success. A case in point was
the big hoopla about maturing postal time-savings certificates. In the
end, very little went into the stock market, and those that did "punt"
in the stock market now find they have much less money for their
efforts. The answer to why financial-service firms are finding it
difficult to attract this big pool of personal financial assets is
pretty straightforward; it's strong aversion to risk. In short, the
bulk of these assets are owned by Japan's seniors, and the last thing
they need from a life-cycle perspective is more risk. The following
points also illustrate that not only are these seniors more
risk-adverse, they are also much more frugal than their overseas

Adverse Demographics: Tougher to Make a Buck
Projections by the National Institute of Population and Social
Security Research indicate the old "one size fits all, especially if
they are young" marketing approach has long outlived its usefulness,
as one in three consumers in Japan is becoming a senior. Indeed,
consumption in 2002 appeared to be solely supported by seniors, where
households headed by baby boomers aged between 50-54 now number more
than those households headed by people in their 30s, at 2.4 million.
These seniors appear to be supporting consumption because they are
less subject to concerns about their job and wages. Households headed
by those over 60, in fact, increased their consumption by 1.8 percent
in 2002 and were the only age group to increase consumption
expenditures last year.

Conversely, households headed by people 29 or younger decreased their
consumption expenditures by 6 percent during the year. From 2000 to
2030, the under-14 population will decline rapidly, while the 15-64
age group (the economic "sweet spot," demographically speaking) will
also contract. Conversely, those aged 65 and over will increase 59
percent, from 22 million to 35 million. In addition, among those in
the 65 and over bracket, the number of "second-stage" elderly, i.e.,
those aged 75 and over, will jump from 9 million to 20 million. Most
of the increase in the seniors group will come from these second-stage

o Seniors are increasingly living alone. One in three households
in Japan already include an elderly member (15.3 million of 46.4
million in 2000), and the rate of increase in households with an
elderly member is substantially outstripping the total household rate
of increase. The most common format is where the senior lives with
his/her offspring -- currently 35 percent of total households with
elderly members. However, seniors are increasingly living alone. Since
1990, the proportion of households with elderly members living with
offspring has rapidly declined, from 49.4 percent in 1990, to 34.7
percent in 2000. In addition, households where the older person lived
alone rose from 15.1 percent of households with an elderly member in
1990 to 17.2 percent in 1995 and 19.8 percent in 2000.

o The majority of seniors will be women. There are already more
elderly women (over 65) than elderly men and the gap will grow.

o Seniors live in relatively larger dwellings. The average area
of dwellings inhabited by older persons is 80 square meters for
single-person households, 108 square meters for elderly couples and
123 square meters for multiple-generation households. That means
relatively higher property taxes and maintenance costs on basically
similar levels of income.

o More Japanese seniors are remaining in the labor force. In
2000, the number of seniors still in the labor force over age 65 was
4.9 million, accounting for 23 percent of total seniors. This labor
force participation rate by seniors is roughly 2 percent that of the
US and several times larger than Germany or France. In other words,
they can't afford to retire, and it will get worse, as the
under-funding and losses in Japan's pension system reach crisis

o Asset value to disposable incomes is 3.6 percent of US
counterparts. The value of assets of older Japanese relative to
disposable income shows a much higher ratio than their US counterparts
(24 times as against 6.6 times). The spending of older Japanese
exceeds their disposable income by 4.5 percent, but even if they keep
this up for 20 years, they will still retain assets worth 23 times
their annual disposable income.

o A majority of assets are in real estate. For households of at
least two persons with the householder aged 60 or over, the average
value of family assets per household is 65.6 million yen, of which
land assets accounted for 38.0 million yen, or some 58 percent of
total net assets. While the average

The government of Japan has designated 15 fields as new growth areas,
including medical and welfare, lifestyle and culture,
environment-related and biotechnology. These are expected to yield 7.4
million new jobs and create new markets worth 350 trillion yen by
2010. Of these new growth areas, medical and welfare-related fields
are expected to become the largest, yielding 1.3 million new jobs. The
social necessity of all these new fields has long been strongly
recognized and there have been high expectations for these areas as
new business opportunities.

Projections have seniors spending nearly 11 trillion yen a year on new
products, home care and home renovations to make their lives easier.
Home care alone is becoming a 4 trillion yen business and is expected
to double by 2010. Construction companies are doing a booming business
modifying homes, and recent government guidelines will require 40
percent of new homes to be built with wheelchair-accessible hallways
and elder-friendly fixtures. The "reformed homes" feature auto-flush
toilets, home elevators and other "senior" amenities. Tokyo Electric
Power Co. (Tepco), set up a subsidiary devoted to the elderly and is
expanding staff. The result, Tokyo Living Service, offers two options:
For 1,600 yen an hour, a helper will do shopping, laundry and chores;
while more comprehensive home help costs over 4,000 yen an hour. Osaka
Gas also has helper services, offers 7,500 yen an hour physical
therapy and runs an old-age home in Kobe.

On paper, the seniors market sounds like a new growth segment in a
stagnant economy. But developing this market is turning out to be an
uphill slog. Tepco's Tokyo Living Service loses money on each home
visit and doesn't expect to break even until this year or later.
Nursing homes such as NAIS Care Owada run by Matsushita Electric
Works, require millions in capital spending on equipment, from
motorized wheelchairs to adjustable beds. Another home-care company,
Comsn, also is going through growing pains as it loses money. The
bottom line is that many of these companies cannot stand by themselves
as proper industries in the market economy for the following reasons:

(1) User needs are diverse, mass production is difficult, and an
individual response is needed.

(2) Few large companies have entered the field because of the lack of
scale merit. Small- and medium-sized businesses provide the bulk of
the services.

(3) Prices cannot be lowered to levels affordable by most seniors
because of the difficulty of trimming costs in these products and

(4) Because of high costs relative to disposable income, the industry
is protected by a subsidy system and this inhibits technical and
business innovation.

The Nomura Research Institute calls these kinds of industries "social
asset industries." While social needs are high, these segments cannot
commercially stand alone due to low individual product demand. Nomura
also calls them "disk-shaped industries" because although needs are
diverse and the market is wide, the demand for each individual item is
low and the market is shallow.

Thus while the top-down prospects for these industries appear
promising: (1) customers are difficult to identify and marketing
strategies are hard to create; (2) customer needs are diverse,
products become niche products, and new product development is
difficult; and (3) service-type businesses are labor intensive and,
therefore, profits are difficult. While large corporations are
involved in some of these businesses, many have won a place in the
market through tightly focused product development and dependent on
the marketing efforts of small- and medium-sized enterprises.

Yet the Japanese government talks of achieving "industrialization" of
these markets -- high growth-era term that requires a broad,
homogenous customer base, economies of scale to achieve falling unit
sales prices and continuous streamlining of distribution channels.
These industries are also not suited to the traditional industrial
structure in Japan, where a vertical division of labor is achieved
through a monolithic "pyramid" structure of numerous small- and
medium-sized companies operating under the umbrella of a large

Playground for Rip-off Artists
Heretofore, the seniors market in Japan has largely been the
playground of rip-off artists, preying on seniors with bogus
investment schemes, or more recently by drawing them to new
"retirement homes" and communities that are essentially designed to a)
milk the government for whatever welfare subsidies they can, and b) at
the same time squeeze the retirement-home residents for as much of
their savings as they can.

The insurance companies and construction companies build and sell
private retirement homes. Only the wealthy, however, can afford the
cost, including an average 28 million yen down payment and 150,000 yen
monthly fees (room and board). Many elderly people sell their homes in
order to cover these expenses. Once they do, they are at the mercy of
the private retirement home operators. When the elderly becomes
bedridden or needs more intensive nursing care, they often cannot
continue to stay at the retirement homes. In addition, should the
private retirement homes go bankrupt, the elderly then have no place
to live. As these nursing homes often receive no money from county and
municipal governments, they are largely outside the control of local

As an indication of the quality of care in Japan's nursing homes, Nori
Graham, British chairwoman of the Alzheimer's Disease International
(ADI), lecture meeting that never in her 30-year career as a geriatric
psychiatrist had she come across the elderly being deprived of their
freedom as they are in Japan. Japan's bureaucratic elite have also
been the subject of corruption scandals involving kickbacks, a golf
club membership and use of luxury cars from a nursing-home operators.
Indeed, Japan's Health and Welfare Ministry has been held up as
Exhibit A of Japanese bureaucracy's coddling industry at public peril
for years. For example, its officials let Japanese pharmaceutical
companies keep selling unheated blood products even after it was known
that they could transmit the virus that causes AIDS -- and even though
safer alternatives were available. Yet nursing-care needs will
continue to rise, as the population of elderly needing nursing care is
expected to rise from some 2.8 million in 2000 to 4 million by 2010.

"Grey Panthers" As a Political Force
At the end of the day, a lot of outside-the-box thinking will be
required to figure out how companies can make a buck in the new
seniors market. More government subsidies and support are not
required. Indeed, Money Watch suspects that the bureaucratic
"administrative guidance" approach taken heretofore to health care and
other seniors markets only encourages more graft and systemic
corruption at the expense of the users of the services, i.e., the
seniors themselves. Until the seniors themselves are more able to
assert their political rights and to more clearly define their market
needs, they will continue to be the target of shysters and rip-off
artists and be manipulated by the bureaucrats of their own government.
In this regard, Japan's seniors need to adopt a more proactive "grey
panther" approach, realizing that the government (particularly the
LDP) will only respond to: a) generous contributions and b) clearly
identifiable voting blocks. Going forward, the demographics are
definitely in favor of the "grey panthers." The main issue, therefore,
is how well they can organize themselves to first demand, and then
obtain, a weight in the political process that is commensurate with
their growing weight in the overall population.

-- Darrel Whitten

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Written by Darrel Whitten

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