Merryn's Blog

Japan: the world's next mega-consumer?

Now that America's consumers are increasingly reluctant to spend, where will demand come from? Many people expect it to be China. But it could turn out to be Japan.

As US shoppers cut back, investors on Wall Street and in the City have been pinning their hopes on Chinese consumers taking up the slack. But China's middle class accounts for just 8% of the country's population, and typically earn just $12,500 (USD) each per year. So even China's affluent consumers don't have the purchasing power to make up for the retreat of the US consumer.

But don't despair. According to Gary Shilling, a former chief economist at Merrill Lynch and long-time Forbes columnist, there is another country that could replace the US consumer: Japan.

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Now, with sales of goods in Japanese stores and supermarkets down 1.4% year-on-year in September, that might be hard to believe. But bear with me.

"There's no such thing as an immigration visa in Japan," as Shilling put it to me in a recent interview. "And as people age, they don't work. So there's a likelihood that with people not able to produce enough for themselves or their retirees, you end up with generational warfare to split up an inadequate pie."

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So how do they solve this problem? "Japan has a huge pile of foreign assets that they've built up over years of running trade and current account surpluses. They could simply liquidate those assets and use them to bring in imports to take care of their retirees without straining the availability of goods and services for those still working."

How? There are signs that the new Japanese government is looking at funnelling capital directly to the hard-hit household sector instead of to producers and employers. For example, by dishing out $300 a month per child to families as a way of reversing a low birth rate. On top of this, the Minister of Finance Hirohisa Fujii has signalled he wants a strong yen. This would increase the purchasing power of Japanese consumers who now account for just 55% of Japan's GDP, compared to 70% in the US.

But will it happen? As an export-led nation, it would require something of a culture change. But, as Shilling says, as the world's second-biggest economy, "They're the logical candidate to replace the US."

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