What if the Japanese economy will start to crash and burn?

Japan’s economic reality

The current state of the Japanese economy is a complex one. The reality that internal and external, positive and negative factors have created, has many facets to it.

This means that the future of Japan’s economy can be both a positive and a negative one. Consequently, the impacts on connected parties, like people living in Japan, and its trade partners.

Read on to find out how the future of the Japanese economy could develop, and unconventional insights on a downturn in Japan.

Pessimistic, realistic, and optimistic scenarios

There are many economic indicators that can be used to predict with confidence a certain scenario for Japan’s economy.

Different interpretations of these indicators, can produce both pessimistic and optimistic future predictions. The different importance placed on these indicators, historical background, and miscellaneous factors, determines the exact scenarios created for the future of this country’s economy.

Pessimistic scenario

In a pessimistic scenario, all the worrying qualities of the current climate of the Japanese economy, and the global economic woes, would create a powerful destructive force.

Factors like the ever present threat of natural disasters, difficult foreign relations, stagnating growth, high specialization in exports, and negative population trends, would then send Japan into a downward spiral.

The impacts of negative global economic trends then would amplify the domestic problems. Together, a pessimistic scenario would manifest in reality.

Although it’s easy to speculate about worst case scenarios they rarely do come true. Even when they do, they happen far later than predicted, and deliver smaller negative impacts.

For Japan, which continues to cope with many inherent negative internal factors, even a perfect storm of economic disasters likely wouldn’t be a cause for panic.

Realistic scenario

Taking into account the fact that many trends related to Japan lead to dichotomous conclusions, a realistic scenario would assume that the situation will remain stable. Or more accurately, that there will be at least a few years where mixed trends will continue.

In a realistic scenario, the positive trends observed in the Japanese economy would be offset by the negative ones. Or, their benefits would just slightly overshadow the unsolved problems in the Japanese economy. It wouldn’t be a zero-sum game, but something close to it on the surface.

japan economy realistic scenario

Realistic future scenario for Japan. Copyright: Money Bear Club.

Positive trends in Japan’s economy, like the growing silver economy, older workers remaining in the workforce, and a stable, if not stagnating GDP growth, would then be offset by negative trends. These include the ever growing, largest in the world, debt to GDP ratio; lagging low and middle value exports, and the still not recovered to the 1990s level Nikkei 225 index.

How long this state of trends will continue, depends on the population dynamics and entrepreneurship of Japan. The realistic scenario should at least continue until a new worldwide crash, in a similar size to the one in 2008, will come.

Optimistic scenario

An optimistic viewpoint would proclaim that the debt taken on by the Japanese government, and the the direction Japanese businesses have chosen, are the right choices for this country. Moreover, these two conditions, according to an optimistic scenario, will help the Japanese economy to get back on track in terms of real GDP growth.

Debt used for rational causes can propel a country’s economy. In the case of Japan, this seems like a less obvious scenario. After all, Japan isn’t a developing economy in need of development loans.

In contrast, Japan is a developed economy with a fast ageing population. Nevertheless, since Japanese loans mainly were taken on to finance necessary operations, it’s reasonable to believe that they will deliver a positive impact.

Strong manufacturing, with a good reputation in the eyes of the world’s consumers, is always a good thing. Especially, for countries with smaller territories and average quantities of natural resources. Japan’s commitment and specialization in manufacturing, could help it to meet any negative external trends with confidence.

If these conditions will come true, a global economic downturn would have only a moderate impact on the Japanese economy. After all, even yearly natural catastrophes, a stock market crash, and all of the negative implications that come with Japan’s population trends, haven’t entirely stopped Japanese growth and development.

Investment income from Japan-centric investments during a downturn

What’s the most straightforward way of making money from a downturn in Japan?  It is investing in Japanese-centric assets which appreciate in value during downturns.

Most inverse Japan-related assets should bring in nice returns during a downturn. These are inverse ETFs and mutual funds.

Income from ETFs changes based on the indices the exchange traded funds track. If the indices which inverse Japan ETFs  track, will be posting bad results, the value of the inverse ETFs would increase.

Money Bear Club hasn’t been able to find an inverse mutual fund aimed at Japan (information correct as of September 2019).

If one were to appear, it would be important to remember that mutual funds come with steep management and performance fees. Lack of intraday price changes isn’t a deciding factor in a bull market, but it could be in a bear market for more nervous investors.

Triple-leveraged, inverse exchange traded funds, would look like the most rational bet of getting returns from a negative situation in Japan’s economy. After all, they deliver triple of the inverse returns on the index they track.

These ETFs are likely the right choice for investors which are comfortable with taking on average risk. ETFs are inherently diversified investments, and no one would call them “high risk”. Nevertheless, a triple-leveraged exchange traded fund is one of the riskiest choices for an ETF investor.

Short forex positions, if a trader is long on yen; and any short positions or puts on certain Japanese companies, also should be a good bet.

The businesses most prone to go with cyclical flows are consumer goods producers, and those related to them. Many most popular Japanese companies belong to these industries.

Analysed in Industries to watch for the coming dip, there are industries and companies which tend to deliver the same performance even during downturns. Calls on these companies, or even an outright share purchase, could be an unconventional way of generating returns during difficult economic times.

However, it’s important to remember that spending preferences of Japanese consumers and businesses, aren’t the same as those of Western consumers.

A possible spillover effect?

The slowdown and an eventual downturn of the Japanese economy could produce a spillover effect on its trading partners and other countries.

Spillover effect is defined as the events that occur in one context, because of other events in a seemingly unrelated contexted.

It’s hard to predict the exact spillover effects of a possible downturn in the Japanese economy. Nonetheless, it’s possible to predict at least the general direction, and the countries affected by a spillover effect from a Japanese downturn.

The most obvious consequence of a downturn would be decreasing internal consumption in Japan. A downturn typically causes lower incomes or losses of income. In turn, this contributes to lower consumption.

Because of decreasing internal consumption, countries exporting into Japan would likely have to cope with lower export revenues. The spillover effects associated with lower exporting revenues, would likely come in the form of outsorcing into countries with cheaper labour, and an influx of labour and new businesses in other industries.

There’s also a possibility of a positive spillover effect because of a downturn. Because there’s a strong possibility that internal consumption will decrease during a downturn, Japanese producers could re-orient their sales to exports. Or, to expanding the number of export destinations.

In order to increase sales in foreign countries, Japanese exporters could try to offer lower prices and/or better value products. The spillover effect from a downturn in Japan, then would come in the form of increasing competition for local producers and other foreign exporters.

This would likely bring down prices, force competitors to increase the quality of their products, or to spend more on marketing. All of these spillover effects would benefit both the local consumers, and the associated businesses (marketing).

It’s very unlikely, but weakest competitors always exist. From a different perspective, the increasing exports could lead to some  local businesses or foreign exporters having to cope with lower sales, in the markets where Japanese exporters would move into.

These lower sales could potentially contribute to lower salaries, movements into other markets, or even lay-offs.

The countries most affected by these spillover effects aren’t necessarily the ones with closest trade relationships with Japan.

The top Japan’s trade partners are China and United States (both in exports and imports). These two global superpowers have enough trade diversification to be able to easily weather a downturn in Japan.

Instead, the countries whose trade relationships with Japan are deeper, and diversification of trade destinations is lower, would see a larger spillover effect.

These countries could be some of the Middle Eastern countries (UAE, Qatar), Malaysia and Thailand. Malaysia is particularly interesting, since it is the 13th largest importer of Japanese goods, and the 8th largest exporter into Japan.

A close trade relationship, and a location in an emerging region (Investing in Asia), could lead to a strong spillover effect in this country.

Solutions for people in Japan

Solutions for people living in Japan centre around increasing incomes during, or after a downturn. Both possibilities to decrease spending, or to increase incomes, should be on their minds.

income during downturn

Generating income during downturns. Copyright: Money Bear Club.

The one occurrence that has appeared during many downturns? Decreasing real estate prices. US and UK property price statistics show a very clear trend on price declines both during recessions, and economic downturns. Data from Japan shows that real estate prices have declined by at least 10%. Of course, there is a probability that a new downturn would bring in different outcomes.

There are ways how to make a downturn advantageous to most people living in Japan:

  • Renegotiation of rent agreements. Rent prices correlate with real estate prices. If real estate prices were to fall, then renters could have a stronger case for negotiating a better rent price. This means that renters could increase their savings, by saving on rent.
  • Buying real estate for a bargain. There have been many stories about Japanese real estate, especially in rural areas, selling for a bargain. Yet, prime real estate, especially in largest cities, still is one of the most expensive in the world. A prolonged recession or a downturn could lead to real estate prices decreasing in Japan. This happened in has happened both in 90s and in 00s.
  • Opening businesses that flourish in a negative economic climate. There are certain businesses that do not conform to the cyclical nature of the business cycle. These businesses flourish during downturns. Examples of businesses flourishing in a negative economic climate include retailers aimed at low income clients, cheap food restaurants, and lenders for low quality debt. Japanese culture and economy is a bit different from the rest of the world. Yet, these businesses could also grow in Japan during a downturn.

There’s also bound to be a boost in tourist numbers, if Japan’s yen were to depreciate. Countries whose economy and/or currency depreciates, often see increasing tourism. This happens because of a comparative increase of other currencies against the currency whose value is decreasing. This makes the services for tourists comparatively cheaper.

Mexico, Thailand, and Turkey are fitting examples of how a currency depreciation brought in more tourism. In Thailand, the depreciation of Thai baht brought in not only larger numbers of tourists, but also expat retirees.

The same could happen to Japan. Japan isn’t the cheapest country to travellers. If yen were to depreciate, businesses and people working in the travel industry could win big.

Predictions do not predict

It’s useful to remember that predictions model and build a world with only known economic conditions. That is, in the face of unexpected news, decisions from businesses, and changing consumption trends, predictions start to age quickly.

Hence, rational thinking, and bringing in new developments to edit old predictions, is the most useful course of action. Even more so for the complex reality of Japan’s economy.

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