Welcome

The foundation of every economy is the people, at least for now. Economic data at it’s core is modeling the actions of individuals and corporate actors, GDP is the measure of goods and services output by a country’s people, and inflation is a metric of how much money people are spending on goods and services.

Jobs, culture, history, future expectations, and more all impact the actions of people (‘consumers’), and thus have a large impact on the economy. Japan is a unique case study because the country has been struggling with inflation for thirty years, and pioneered many economic policies that the rest of the world later adopted.

This comparison is more done out of curiosity than the hope to find anything specific, perhaps by the end something interesting or actionable will emerge.

Outline

• Brief History
• Demographics
• Saving Habits
• Investment Habits
• Energy and Food
• Future Expectations

Brief History

Since the great Japanese property and real estate bubble burst in 1991 the country has struggled to grow it’s economic output. The stagnation in Japan is clearly visible in the consumer price index (Big Mac index added for fun), which has hardly budged since the mid 90s.

Similarly, GDP growth has struggled to keep up with the United States. This is a reality we now accept without question, but in the 80s economists around the world were predicting Japan surpassing the US as the leading economic power and searching for their ‘secret’.

The impact thirty years of stagnation has on a country’s people is hard to overstate – it infiltrates every level of society from individual cash saving habits to institutional investment strategy, as well as optimism (or lack thereof) for the future.

Demographics

Japan has an aging population, a similarity shared by many developed nations. A decline in working age citizens puts deflationary pressure on the economy, as there are fewer people creating the goods and services measured by GDP.

Another complication of an aging population is that retirees are more stingy with their money. Employed people have an expectation of future income, whereas retired people are more often reliant on savings or pension/ investment income.

The population dynamics in Japan could be attributable to a few things:

• City dwellers have less children than rural and it’s estimated 93% of Japan’s citizen live in urban areas. The US number is ~80%.
• Stagnant economic growth may discourage people from having children due to pessimistic future expectations. The US has had no such period of stagnation in recent times.
• Japan gets far less immigrants than other developed countries like the US.

An aging and shrinking population makes growth difficult to achieve naturally and can be fixed only by technological advancements, lots of immigration, or government policies that encourage/ enable spending.

Saving Habits

Due to the deflationary environment of the past thirty years Japanese households keep a much higher percentage of their assets in cash. This is due to a variety of factors, but largely because prices have hardly changed, as visible in the CPI shown above.

When US investors are picking stocks and riskier assets (other), Japanese investors are hoarding cash.

When money is saved it is not recycled back into an economy via spending or investment. The propensity for US households to invest in the stock market means US companies have more access to capital than Japanese ones, which makes growth easier.

Investing Habits

While people in the US prefer to ‘save’ by investing, Japanese people prefer to save by holding cash, which means not investing. The lack of domestic investment has made capital more scarce for Japanese corporations. The bear market in Japanese stocks that kicked off in the early 1990s has been a self-reinforcing cycle of investors shunning the domestic market for cash or overseas investment, leading to a continuation of the struggle for Japanese stocks.

Both US and Japanese investors would rather invest in US markets. Returns are higher, markets are more liquid, and confidence abounds.

The preference for US stocks and bonds exhibited by Japanese consumers and institutions has far reaching and fascinating implications. Japan is the biggest foreign holder of US Treasuries, beating out the largest exporter to the US, China, who has a habit of recycling their export profits into treasuries.

Since it is such an important point, I will put another chart showing household investment breakdown for Japan, Europe, and the US. Japans habit of investing in cash is unique and a part of the reason growth and inflation have remained low in the country.

Energy and Food

Most developed island nations rely on food and energy imports, Japan is no exception. As noted earlier, over 90% of the population is urban, and if that wasn’t enough, a large portion of the country is mountainous.

This reality does not directly affect Japanese consumer behavior, but has an import indirect and subtle impact. The currency is kept relatively strong to make imports cheaper, which has led to citizens believing the currency will always be strong, so cash is a safe store of value. Reliance on others for critical goods is one of the multitude of reasons the population is risk averse.

On the other hand, American people import goods on the low thanks to a constant demand for Dollars worldwide. Our energy and food needs can be met within our borders in a pinch, especially with the support of Canada and Mexico.

Future Expectations

Much of economic growth and activity is based on future expectations. When people expect the sun to shine tomorrow they plant seeds, invest in new endeavors, and spend. If they think the clouds will be grey and everything might wash away, the hoard and prepare for the worst.

A large part of Central Bank action is geared toward guiding expectations. Things look down and dirty? Do or say something that will get people expecting growth and prosperity tomorrow (or at least stock prices to go up). People way too excited and lavish? Raise interest rates and vocalize the need to curb excess. The masses usually follow.

The Central Bankers have this power, to a limit. Future expectations are also set by history, culture, and habits.

Americans have a tendency towards action when compared to the Japanese, oftentimes rash, but rarely punished when viewed through aggregated economic actions. We spend liberally, don’t worry about where our food or energy is coming from, and expect to maintain our position as the main global power until the day we die.

Japanese on the other have a far more cautious and often pessimistic view of the future. Thirty years of stagnation, a reliance on critical imports, an aging population, and an unappetizing domestic stock and bond market are a few of the reasons.

This is meant to be a summary of the differences in and drivers of consumer behavior in the US and Japan, not a prediction of anything to come. Due to globalized trade and financial markets the actions of Japan have a significant and underappreciated tie in with what is happening in the United States. When tides inevitably begin to change, having at least a solid overview of the everyday persons mindset and financial habits will be valuable.

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