The Peter Zeihan Podcast Series - Japan: Zero No More (Interest Rates Are Rising) || Peter Zeihan

Episode Date: March 25, 2024

The Japanese have just announced an interest rate increase to a whopping 0.1% after seventeen years of zero to negative interest rates. So, is this a sign of a return to normality for Japan or is something else going on? Full Newsletter: https://mailchi.mp/zeihan/japan-zero-no-more

Everybody, Peter Zine here coming to you from Snowy, Colorado. The news last week in the financial world is that for the first time in 17 years, Japan raised its interest rates above zero. They're now 0.1%. Very exciting stuff. Let me give you the backdrop. So I talk a lot about demographics. Japan is the original demographic basket case. They started industrializing around the turn of the last century,

and were the first significant country after Germany to be majority urbanized. And I like Germany where you have suburbs, you basically just have inner city followed by more inner city with everyone living in condos. So they've had the world's lowest birth rate for quite some time until recently. And they're definitely the world's, until recently the world's fastest ageing society and are still the world's oldest society. They found a way to mitigate some of that, but it's really just slowed the decline. Definitely not reversed it.

Anywho, once people age, I passed roughly 50, and it's a different forever culture, but roughly there, they start consuming less and saving more. And in a case of Japan back in the 1980s, which was one of the most productive economies in the world, you got this super saturation of the local market with high-tech goods, and then everything had to be sold abroad. It was a combination, social management, political, and economic plan all in one. That meant that Japan became the boogeyman of the day for the Americans because they could sell high-tech stuff for cheaper than the Americans could make it at home.

But it also meant that back in Japan, the super saturation pushed prices down. And if you think prices are going to go down, you tend to defer your purchases for a little bit because they'll go down more. And that happened across every economic sector in Japan for decades. and eventually got to the point that between trade tensions, which triggered problems with the United States, that forced Japan to offload some of their manufacturing to other countries, most notably the United States, in order to keep relations okay. You also had people aging and aging and aging and eventually hitting mass retirement.

So the bulbs in the population pyramid in Japan is past the age of retirement already, and people who are retired don't consume much at all. So after 30 years of consumption being flat to negative, You're now not simply dealing with the different population structure that can't consume. You also have a smaller industrial base in Japan because so much of it has been offloaded and moved to other places for a mix of strategic political and economic reasons. Well, that means deflation has never really gone away. And that means that the Japanese have been really having problems stimulating consumption. Normally, normally, interest rates are, to be perfectly blunt, a method of regulating demand.

The idea is you make them lower so it's easier to borrow when you want people to buy more. You raise them when you may as slow down and fight inflation so that they'll buy less. That's how it works. But once you get into deflation and you eventually drop your interest rates to zero, you can't go any further. Well, I guess the Japanese did. You went negative so you actually get paid when you borrow money. But it wasn't enough to change the fundamental mechanics of it. Now, in recent years, especially with the recovery from COVID,

we've been seeing inflation throughout the manufacturing supply chain system. Japan is no exception to that. And so prices have risen in Japan triggering monetary policy changes like raising interest rates to a record high in recent years of 0.1. But this is not a sign of a return to something that's more normal. This has only occurred because of increase in prices for the inputs of raw materials and the outputs of intermediate and finished products. This is a supply chain reason for inflation going up, not a demand reason.

So while it's a little bit more normal today in Japan and banks can work a little bit more normally, which is a good good thing, there hasn't actually been a fundamental change in the core problem that plagues the country, and that's that demand has been steadily dropping now for an entire generation and is unlikely to recover. Why does this matter? Well, Japan used to be the world's second largest country, and it has basically stalled for 35 years now. Second, in the meantime, a lot of other countries have caught up even past Japan in terms of the speed of aging. If you remember earlier, I said that Japan's birth rate had risen a little bit, and its aging had slowed a little bit, not recovered, not reversed, but slowed. A lot of other countries have screamed right by it. Countries that are now aging faster include Korea, Taiwan, Thailand, China,

Germany, Italy, Spain, and Poland. And now it's kind of a race to see who gets to the bottom first. Which means this sort of problem. It's not so much that it's Japan's old normal and still new normal. It's about to become the new normal for a whole swath of countries that we have long associated with robust economic growth and high levels of industrial production. So Japan's past is the future for a lot of these countries,

and Japan's present doesn't look all that hot either.