US vs Japan: Right Shoulder Up, Down, or Level?

Yesterday, David Rosenberg lauded this recent NYT op-ed by Japanese literary professor Norihiro Kato:

In Japanese, people use the phrase “right shoulder up” to describe a graph that keeps going up, with each year’s figures rosier than the last. Of course, if that climbing line is someone’s right shoulder, it means the left is languishing somewhere out of sight. We’re seeing only half the person.

Reading the papers that morning at breakfast, I saw a graph indicating the point in the 1990s when Japan’s G.D.P. had peaked, after which the line started jagging down and up, over the long run comparatively leveling out. The relief I felt had something to do with the person I saw there, no longer so awkwardly bent. Finally we know where Japan stands — on level ground.

Kato also observed that in Japan, it’s been “right shoulder down” for population growth, rice production, and younger generations’ consumption, hedonism, and optimism; ”right shoulder up” in frugality and anxiety; and a marginal turning inward.  Kato continues (emphasis added):

It is, perhaps, a sort of maturity.

The rest of the world’s population is still exploding, and we are coming to see the limits of our resources. The age of “right shoulder up” is over. Japan doesn’t need to be No. 2 in the world, or No. 5 or 15. It’s time to look to more important things…That, the new maturity says, is still cooler than right shoulder up.

…some people don’t see things this way. The old guard — those politicians who led the charge in the heady 1970s and ’80s and fought back (however pointlessly) against the economic stagnation of the ’90s — still want to compete…They hate being beaten by China. For them, it seems, maturity only means striving to be No. 1. They won’t change. They are too settled in an earlier stage of development, in a dream of limitless growth. But society matures around them.

The new maturity may be the province of the young Japanese, but in a sense, it is a return to something much older than [Mayor of Tokyo] Mr. Ishihara and his cohort. Starting in the 19th century, with the reign of the Meiji Emperor, Japan expanded, territorially and economically. But before that, the country went through a 250-year period of comparative isolation and very limited economic growth. The experience of rapid growth was a new phenomenon. Japan remembers what it is like to be old, to be quiet, to turn inward.

Freshly overtaken by China, Japan now seems to stand at the vanguard of a new downsizing movement, leading the way for countries bound sooner or later to follow in its wake. In a world whose limits are increasingly apparent, Japan and its youths, old beyond their years, may well reveal what it is like to outgrow growth.

We shouldn’t be surprised that a literary professor can spin such beautiful prose, but what about the substance behind his argument, especially to American sensibilities?  Is it true that growth might one day be outgrown?  Could it happen sooner than we think?

We highlighted the word “cohort” in Kato’s op-ed because we think demographics might be playing a critical role in the process that Professor Kato articulated.  Consider the population dynamics in the epochs that Kato cited.  The Meiji Empire of Japan lasted from 1868 until 1913.  From 1721 until the start of the Meiji period, Japan’s population growth averaged roughly 0.10% per year.  During the Meiji period, it averaged 0.90% annually.  And from the end of the Meiji until 1975, it averaged 1.26%.  The Professor might be on to something. Note the massive “right shoulder up” in the following chart that began at the start of the Meiji Empire:

Population growth had followed a “right shoulder level” pattern for all of the 18th century and part of the 19th, until Japan’s demographic transition—a sharply falling death rate followed later by lower fertility rates—began in earnest.  It’s almost certainly not a coincidence that the rise of the Meiji Empire coincided with several generations of unprecedented population growth.  That type of shock—what economist Diane Macunovich has termed a Birth Quake—can have many material and psychological impacts.  On a national level, some of those impacts may well have stimulated outward expansion by Japan and other countries.  In fact, as soon as we acknowledge that the 20th century was a pronounced and unusual “right shoulder up” epoch, it helps us think about its many unprecedented political and economic events.  It also can help us better assess what is “normal.”  For example, Professor Kato’s “quiet”, as alien as it it may sound to anyone born in the twentieth century, is probably the normal condition of a society where population is stable or contracting.

To characterize earlier, more aggressive generations of Japanese citizens, Kato invokes Shintaro Ishihara, the incumbent mayor of Tokyo.  Ishihara was born in 1932, a time at which Japan’s rate of growth had levelled off, but was still at a very healthy clip that would be maintained for another forty years.  The competitive and expansionist character that Kato attributes to the “Ishihara cohort” may have been shaped by the myriad social and economic effects that rapid population growth can have.  As for Professor Kato, he was born in 1948, just before Japan’s population growth rate entered a pronounced “right shoulder down” phase, and the effects of that sharply slowing growth  have almost certainly shaped the prevailing views of his generation.

Relevant questions for investors are:

1. Are demographics truly destiny? If so, how?
2. Is the U.S. likely to follow the in Japan’s demographic footsteps?

On the first question, it’s hard—impossible, really—to deny that the rate of population growth has real economic impacts.  Consider that the neoclassical growth model, crude as it may be, is underpinned by population growth.  However, per capita GDP, which measures what a typical individual is capable of producing in a given period of time, largely determines standards of living.  With some qualifications, individuals alive today, though they may claim to be more frugal and anxiety-ridden than prior generations, are certainly better off than those who lived through periods like the 18th century.  There are also internal population dynamics to consider, such as age structure. By some metrics, Japan’s economic performance could surprise to the upside in the second half of this decade. 

On the second question, the U.S. is decidedly unlike Japan when it comes to historic and expected annual changes in population:

This stark contrast has been attributed to differences in fertility rates, immigration policies, and population density between the U.S. and Japan.  While expected long term growth of the U.S. population is lower than it was in preceding decades, it should confer a decided advantage relative to other developed economies, and also help us keep pace to some degree with today’s demographic and economic upstarts.

However, on certain age structure metrics, the U.S. is absolutely following in Japan’s footsteps, in that the relative share of our most demand-supportive and productive age cohorts are in decline.  For example, the population share of  young adults of is set to decline early in this decade until the late 2020s.  All else equal, that means falling rates of household formation, falling demand for homes and durables, declining credit demand and rising savings rates, and a significant long term drag on GDP, from a generation that has already been severely impacted by the 2007-2008 recession.  If public policy errors are made, it could also result in rising or persistent pessimism and anxiety.

Note that this pattern roughly follows Japan’s, with about a ten year lag:

So while the overall U.S. population should be “right shoulder slightly up” for the next forty years, we still face the kinds of age structure risks that Japan has endured since the 1990s, a fact that calls for a different investing mindset—as well as a different public policy mindset—from the one that’s prevailed since the arrival of the Baby Boomers. 

Sources of Japanese population data:

http://en.wikipedia.org/wiki/Demographics_of_Japan_before_Meiji_Restoration (1721-1872)

http://en.wikipedia.org/wiki/Demographics_of_Imperial_Japan (1872-1919) 

http://www.demographia.com/db-japanpref.htm (1921-1949)

http://www.census.gov/ipc/www/idb/informationGateway.php (1950-2050)

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