same old story

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Japan Stocks Crashing – Is the U.S. Next?

The iShares MSCI Japan ETF (EWJ) — a fund holding a basket of Japan stocks — had a great 2013 thanks to “Abenomics.” The loose monetary policy from the Bank of Japan led to a dizzying 57% increase for the Nikkei stock market index last year, and a total return of 26% for the EWJ fund.

The smaller WisdomTree Japan Hedged Equity Fund (DXJ) — which holds Japan stocks but hedges against the yen — put on an even better show thanks to a weaker yen and stronger dollar, with a 2013 return of 41%.

But if you think Japan is a good buy anymore, think again. Both ETFs are down more than 10% year-to-date after their big runs in 2013.

This juicing by the Bank of Japan has run out of gas. Persisting now are the old pressures of “stagflation” brought on by slow economic growth and ultra-low inflation that has suppressed spending and wages.

Why? Well, because of demographics, of course. Older Japanese citizens demand more public spending but produce less economic output, and that trend has continued unabated.

Take this, from the Japan Times today:

“Japan’s population has shrunk for the third year running, with the elderly making up a quarter of the total for the first time, government data showed Tuesday.

The number of people in the world’s third-largest economy dropped by 0.17 percent or 217,000 people, to 127,298,000 as of last Oct. 1, the data said. This figure includes long-staying foreigners.

The number of people aged 65 or over rose by 1.1 million to 31.9 million, accounting for 25.1 percent of the population, it said.

With its low birthrate and long life expectancy, Japan is rapidly graying and already has one of the world’s highest proportions of elderly people.

The aging population is a headache for policymakers who are faced with trying to ensure an ever-dwindling pool of workers can pay for the growing number of pensioners.

The country has very little immigration. Any suggestion of opening its borders to young workers who could help plug the population gap provokes strong reactions among the public.

The proportion of people aged 65 or over is forecast to reach nearly 40 percent of the population in 2060, the government has warned.”

There are two lessons here:

The first is that any central bank fixes cannot help Japan truly counteract the weight of an aging population and demographics that result in a smaller and older workforce every year.

The second is that America had better wake up and seriously look at social programs, immigration reform and other issues to prevent our nation from being stuck in the same situation. The baby boomers are aging and skewing our demographics (and economic growth prospects) steadily closer to what Japan is suffering right now.

Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP

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Comments
  • sealclubber

    Disagree with the underlying narrative here…. the US, like Canada, have flexible immigration policies and hordes of outsiders that want in. Canada in particular is already tweaking it’s immigration policy in recognition of these future threats.
    Example: foreign students used to be permitted to study and that’s it – sticking around after their studies are completed was strictly prohibited. Now single students are able to stay (with or without gainful employment) for years after they complete their studies. Assuming they find employment in that time, they are able to extend their stay indefinitely. The government wants them to stay, build lives and have kids.
    If the US goes through the Japanese experience, it will be due to gross negligence in other areas – not entitlement spending.
    Having said all of that, I agree that reforming entitlement spending is very important for both Canada and the USA – but for very different reasons.