Another way of thinking about the country's demographics is its dependency ratio: how many dependents every 100 workers have to support. That's the ratio of young people below the age of 15 and older people above the age of 65 to the number of working-age people between 15 and 65. The forecast in the chart above is from the World Bank. It's pretty clear that the ratio is just going to continue getting worse and worse. How are fewer and fewer workers who have to support more and more dependents going to increase their savings? Admittedly it happened between 2002 and 2007, but those were good years for Japan. It's not likely to happen again soon, in my view. So my guess is that over the coming years, total Japanese savings will continue to decline.
Japanese investment however appears to have bottomed out and is likely to continue at least at the current level. Companies can't reduce their investment, because the aging and shrinking population means they have to replace labor with machines. So I think savings is likely to decline further and for longer than investment does.
Eventually I expect Japan's investment to exceed its savings, or in other words, for the country to run a current account deficit. And that's going to be a problem for Japan, because then it will have to attract foreign investors into its markets, particularly its bond market. And very few investors outside Japan want to buy Japanese government bonds, because they have not just the lowest nominal interest rates in the world, but almost the lowest in recorded history, while at the same time the government has the worst debt situation in the developed world.
To make matters worse, if the government is successful in its drive to raise the inflation rate, that will only further reduce the real interest rate on Japanese bonds, which is already the lowest of the major bond markets. That's going to be a hard sell and that's why I expect the yen to trend lower over the next several years.
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Of course, the savings rate has been coming down for years and it hasn't yet eliminated the current account surplus. That's probably because the investment rate has been coming down, too. It's possible that Japanese companies could keep cutting back on their investments, although I think it's unlikely. Oddly enough in Japan companies have been net savers too for many years. In most countries the corporate sector is a net borrower of funds. But I don't think this is likely. I agree more or less with this side of the IMF's forecasts.
So that's why I'm bearish on the yen over the longer term: as the current account slips into deficit, it will be difficult for the country to finance itself without higher interest rates, but those higher interest rates would mean a snowballing debt for the world's most indebted government. And that's a recipe for disaster.
The author is the Global Head of FX Strategy at IronFX Global, an on-line trading firm specializing in Forex, CFDs on U.S. and U.K. stocks, and commodities. He was previously Head of the Forex Committee at Deutsche Bank Private Wealth Management.