Let’s talk Japan.

Every year some analyst comes out with a variation of the story that Japan’s economy is about to rebound.

Usually the argument goes something like this: Japanese markets are impossibly cheap and the central bank will be there to prevent a catastrophe.

Or sometimes there is another variation of the Cinderella story.

Either way, don’t hold your breath. Japan’s economy posted its first trade deficit since 1980 last year and the big trade surpluses needed to drive the Nikkei back to its glory days are over.

At best, Japan’s economy is going to see balanced trade figures or a small surplus in the years ahead. It won’t be enough.

If you’re not familiar with what a trade deficit is, here’s what you need to know: Japan imported $32 billion worth of stuff more than it exported for the first time in 31 years.

Fighting the Demographic Tide

Critics say there are mitigating factors behind the figures and they’re right.

Against the backdrop of one of the world’s fastest aging populations, one of the lowest birth rates on the planet, a renewed reliance on foreign energy, and a yen that is so expensive that Japanese corporations are offshoring production, it won’t be long before the country eventually plows through its savings.

So $32 billion is just the beginning…

In fact, we are more likely to see Godzilla walk out of Tokyo Bay than we are to witness a return to Japan’s halcyon days.

Worse, I believe that within the next five years, Japan’s economy will long for the good old days when the trade deficit was merely $32 billion, instead of $100 billion, $200 billion or worse.

Not one of the things I’ve just mentioned – that the critics cite as short-term influences – are anything but continuations of much longer-term trends. Nearly all of them are being driven by Japan’s declining population.

You may not know this, but Japan’s population is projected to shrink by 30% by 2060. That means the total population will go from 128 million people today to only 87 million people in less than 50 years.

That’s hard to imagine since Japan is one of the most densely populated countries on the planet. But the effects are already visible.

In my neighborhood in Kyoto, for example, we see abandoned houses that fall in on themselves after people die and there are no longer any other family members to live there. We see schools that are shut down in the region because there are no kids to attend them.

We’re also seeing companies shuttered because there are no markets for their products, including my wife’s family kimono business, which closed after 300 years in existence.

Simply put, you just can’t grow a population or its stock markets without people.

Japan also has no immigration policy to speak of, so there is no means of replacing the “silvers,” or senior workers, who are leaving their productive years behind them.

By 2060 the number of people who are 65 or older is going to double. At the same time, the number of people in the workforce between 15 and 65 is going to shrink to less than 50% of the total population.

By 2050, there will be 75 retirees for every 100 workers. By comparison, in the United States in 2050 there will be about 32 retirees per 100 workers.

You’d think Japan could get “busy” and produce more children but even that’s problematic. The country has one of the lowest birthrates on the planet. Many young Japanese simply don’t want romance — let alone children.

In fact, many Japanese don’t even want sex.

As reported by CNBC, one AFP study reported that 36.1% of teenage boys between the ages of 16 and 19 have no interest in sex. That study in 2010 reflected results that were double the 17.5% reported only two years earlier. Girls are even worse, with more than 59% in the same age group reporting no interest.

Things are so bad according to one study I’ve seen, that at the current birth rate the last Japanese person will be born 953 years from now.

Game Over For Japan?

Critics challenge this assumption, arguing that somehow Japan’s hyper-aged will reinvigorate the economy in an orgy of retirement spending and consumption.

That depends on generous pensions and an intact financial system – neither of which Japan has at the moment.

Japan’s debt stands at 200% – 253% of GDP, depending on which studies you read, and is headed in the wrong direction. In fact, it looks like a ski jump that’s three times our own debt burden. Senior citizens I know are doing everything they can to hang onto their jobs for as long as they can.

As a result, there is literally nowhere for younger workers to go… except into low value “arubaito” or part-time work with no benefits, no promotions and very little economic value to contribute to Japan’s recovery.

My nephew, for example, struggled for years in such a job before getting training and finding work as a mechanic for Mazda.

To be fair, Japanese citizens purchase approximately 95% of Japanese debt. That’s why the country has been able to hang on and has not had its own Greek holiday.

By contrast, we borrow about 50% of our money as a nation from overseas, and we’re dangerously close to our own version of Greece’s meltdown.

But as the number of retirees rises and the number of workers falls, the Japanese government is going to have challenges maintaining this internal funding capacity.

At some point – either because there are not enough debt buyers or rates rise too high – they’ll have to turn to external creditors and interest rates that could easily be double the 1.5% the Japanese government pays lenders now.

At that point, debt payments would consume more than half of all government revenue according to The Atlantic.

And then it’s game over.

So what’s an investor to do? Well for one thing, I sure as hell wouldn’t invest in Japan on anything other than an extremely short-term basis.

Despite the fact that trade deficit numbers may ping-pong back into positive territory in the months ahead, there’s no reversing the current long-term trend.

The notion that the Nikkei is somehow undervalued is naïve if you do not take the population and its effect on debt into account.

While it is true there may be short bursts of growth, there’s no ignoring the fact that the bellwether index is trading at 8,802.51, or 77% below the high it achieved in 1990 and 12% below where it started in 1984.

With very few exceptions, money invested in Japan’s economy is going to get trapped there.

That’s why, unless you’ve got money to burn, you can say “sayonara” to Japan.

Keith Fitz-Gerald
Chief Investment Strategist, Money Morning (USA)

If you read the mainstream you probably think it’s bad news for Australia if house prices keep falling.

That it’ll be bad for the banks (which it will be). And that the entire Aussie economy will grind to a halt.

But what if that doesn’t matter?

What if falling house prices is actually a good thing?

In a moment we’ll explain why bad news for the housing market could mean good news for stocks…

But first, some in the mainstream still can’t accept what’s happening.

In today’s the Age, Ian Verrender writes:

“Rather than the much-heralded assault on the Australian residential housing market, as has been predicted for the past five years by an ever-increasing host of international and domestic doomsayers, we are instead witnessing an orderly retreat.”

Arguing against a house price crash is so 2009.

Perhaps Mr. Verrender should look at the latest press release from RP Data. Especially the following chart:

Tell buyers in Brisbane, Melbourne, Hobart, Adelaide, Perth and Darwin prices haven’t crashed. Remember it wasn’t so long ago the mainstream told you Aussie house prices can’t fall.

In reality, the crash started long ago and is in full flight now. It’s wreaking havoc on those who expected to make a killing buying a house two years ago.

But now they’re learning Borrowing 101 the hard way. They’ve found out leverage is a double-edged sword. You benefit when prices rise. But you lose when prices fall. For the poor souls who bought at the peak, using a 90-95% mortgage, they’re already in negative equity.

In fact, a buyer needs prices to rise at least 10% in the first year just to break even – after factoring in buying costs and mortgage costs. So when prices fall 8.7% (as they have in Brisbane), it’s a big deal.

Because now those buyers need the price to rise at least 20% to get back to square one. And the more time passes without prices going up, the worse it gets. The knock-on effect is others will fall into negative equity too.

This is something most of the so-called property experts don’t get. They’re too busy with their fancy spreadsheets and economic models to fathom the impact of falling credit.

But failure to understand credit isn’t their biggest mistake. Their biggest mistake is to think housing drives economic progress.

It doesn’t.

Housing is the reward for economic progress.

Or that’s how it should be.

Except the credit bubble distorted the market. Rather than working hard to achieve the reward, credit has allowed consumers to get the reward first with the promise they’ll earn it later with hard work.

Trouble is, with so much effort going into building the reward, they forget about the rest of the economy. We liken it to an athlete stuffing his face with cream cakes before the race because he’s so certain he’ll win. Only, when it comes to running the race, with a belly full of cake, the athlete is no longer in the right shape to win.

That’s what happened to the U.K and U.S. housing markets. And it happened to the Aussie housing market too.

With so many resources going into building houses and apartments… and so much bank lending going towards housing… real businesses miss out.

But now, with falling house prices, could this actually spell good news for Aussie businesses and stocks? If so, it could mean higher stock prices and bigger returns on your investments.

Think about it…

You could see a shift towards stocks if investors wake up to the idea that housing is an expensive investment and that returns aren’t guaranteed.

If you’re an investor who’s concerned about the future, do you really want to take out a six-figure mortgage and pay tens of thousands of dollars in buying and holding costs? Or would you rather stick cash in the bank and take a few speculative punts on the stock market?

And consider this: is it a coincidence that U.S. home prices keep falling even though the U.S. stock market has more than doubled since March 2009?

Of course, central bank money-printing and low interest rates have played a large part in boosting stock prices.

But why didn’t it boost house prices? Simple, because housing is expensive and investors lost faith in the ability to make a buck from it.

Now, “Australia is different”, you’re always told. Because, in Australia, the Reserve Bank of Australia (RBA) can lower interest rates to stop house prices falling, boost demand and push prices up.

So far that hasn’t happened. In fact, the latest home sales numbers show the RBA’s last two interest rate cuts haven’t helped the Aussie housing market.

As even the housing bulls at CommSec note…

“New home sales fell by 4.9 per cent in December and was holding just shy of the 11-year lows reached in September.”

If what happened in the U.S (and U.K.) is anything to go by, there’s a good chance the same pattern will repeat here: investors will stay clear of expensive housing and buy stocks instead.

Remember, interest rates are low because central bankers want to stimulate the economy… because investors, consumers and businesses are cautious.

And as long as that continues (and it seems set to) it’s unlikely consumers will borrow large amounts of money to buy risky, illiquid and over-priced housing…

Not when you can buy dividend paying stocks that pay an income stream and growth stocks that you don’t need to borrow a fortune to buy.

Already Aussie investors are unknowingly following the lead from overseas. They’re getting tired of falling bank deposit rates and are instead looking at the risky and liquid but not over-priced shares in the stock market.

As far as 2012 goes, there’s no argument. The more house prices fall, the better it is for stocks.

Cheers.
Kris.

via moneymorning.com.au