Monday, October 2, 2017

Tale of Two America's - Japan

Japan is patient zero in the global economic epidemic.  Japan's plight and reactions to the ongoing depopulation are so educational, particularly as many of America's regions and most rural areas are now suffering the same depopulation that has Japan in such a bind.

Japanese real estate prices peaked in 1991 and cratered for over a decade.  However, Japan has instituted a hyper-monetization policy since 2008 (via the BoJ) that is lifting all asset class prices.  Japan has unleashed all it's arrows and the US is following Japan, likely fully within 2-5 years, and global hyper-monetization will be standard policy.  Here's why...

Japanese Situation...

The chart below shows the annual change in Japan's core population (15-64yr/olds, columns) vs. Japan's total employees (line).  As the annual core population growth slowed dramatically in the late 1980's and ultimately began declining in 1995, employment began receding as well and has never recovered the 1997 peak.  The core population has fallen in excess of 10 million to date (a 13% decline) while employment sits nearly a million below peak.
The annual change in core population (columns) and annual housing permits (line) are shown below.  Housing permits bottomed in 2009 down nearly 60% from the 1973 peak.  But while core population continues to decline and total population began declining in 2009...housing starts have been rising since 2009.
Below, the total Japanese population (black columns) began declining in 2009 and has fallen in excess of 1 million residents since.  The BoJ's response has been an accelerating deluge of asset purchases (annual change in BoJ assets (red columns)).  The upward impact of the BoJ's hyper-monetization on residential property values has been plain (blue line) despite the rising quantity of new home construction versus a declining quantity and quality of potential home buyers.
Close up of above.  Again, residential property values vs. BoJ assets...all against a declining total population.
The BoJ's hyper-monetization scheme (red line) is pushing Japan's residential real estate values higher (blue line).  The chart below highlights the BoJ's total assets vs. Japanese residential values.
Regardless total population declining, the number of households is still minimally rising (est. to peak in 2019) as the average household size continues to decline (chart below) due to the surging quantity of single person households.
But there is a very large caveat that is so important...the differing fates of the Tokyo metropolitan area and the rest of Japan.  Tokyo is sucking all the population growth out of the rest of Japan in spite of incredibly low birth rates.  The chart below shows the Tokyo metro areas continued growth vs. the remainder of the nations decline now well under way.  Tokyo's growth will come at the expense of the remainder of Japan.  The ramping migration of young flocking to Tokyo  in search of job opportunities is the rest of Japan's loss.So while stories of increasing numbers of vacant homes across Japan continue to circulate, the property values (driven by Tokyo's ascent) are rising.


Lastly, the chart below details why this BoJ scheme of hyper-monetization is a bridge to nowhere.  The chart shows the Japanese child bearing population (15-40yr/olds) has already fallen 25% from the 1975 peak and will be down 37% by 2030 and only continuing to fall from there.  The impact of a massive depopulation among the child bearing population (which itself has an ongoing negative birth rate and little immigration) is a 50% decline in births already from peak.  Only further declines and depopulation are in store from here.


This collapsing total population, core population, and child bearing population coupled with declining numbers of employees equates to a collapsing quantity of potential homebuyers.  However, the true reality is that the 70% of Japan outside of the Tokyo metro area is far worse off.  It is doing all the depopulating (with it's young adults syphoned off to Tokyo), likely bearing far larger job losses (to Tokyo's job gains), and home to a higher percentage of retirees than Tokyo.

Add to this mix the rising creation of new housing inventory, mortgage rates that can effectively go no lower than their present fixed 35yr mortgages @ 1%, and real incomes are not rising...and the implications for housing prices across the majority of Japan are stupendously negative.

This means the BoJ hyper-monetization scheme (where-by the BoJ will conjure money from nothing and trade that "money" for real assets, eventually buying up nearly all Japanese assets) is well underway and there is no turning back...ever.  An ever increasing and ramping supply of digital money will be directed by the BoJ to remove ever greater assets opposite an indefinitely declining populace and employment base.  This will squeeze asset prices higher despite, as in the case of homes, they no longer have any utility.

In America, this same process is underway and the meteoric rise in federal debt per 25-54yr/old employee vs. long stalled real incomes is shocking (chart below)...but nothing compared to what is yet to come.



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