Aging population, a time bomb for Japan and the United States?

As I spoke about Japan in the Q1 market report, just like the United States of America, Japan is a country with a massive debt load, currently standing at 11$ Trillion. These two countries are the world economic powers and the reason why they have such borrowing power is that one, for the United States, the USD is the world reserve currency and for the latter, Japan is mostly funded internally at a very low rate, where the rates on the 10 year JPY bond remained between 0.5% to 2% over the past decade, much lower than any other country in the developped world. This cheap internal financing makes them much less sensitive to an increase in interest rates resulting from the country’s default risk.

As the Japanese population age, the government may have to rely increasinly on foreign investors (just like the US) to service their financial debt burden. Japan’s debt to GDP ratio is at 225% while Greece’s ratio was 130% for 2010 and was at the blink of default. But even if Japan's debt to GDP is way higher than the Greek's, currently, in Japan, only 5% of the government bonds are held outside the country while comparatively speaking, about 70% of Greek government bonds were held by foreign investors. Now you can see how much internal borrowing can affect the debt load of a country.

As an estimate by the US census Bureau, by 2025, over a third of the Japanese population will be 60 years or older up from 30% today. This is not a short term problem, but as they need to increasingly rely on external financing at a higher rate when the population ages, we can see how this can become a big concern for Japan in the upcoming decade.

In the US, approximately 18% of the population is over 60 years old. The United States’ government is having the same problem with financing their social security programs as the ratio of young versus old decreases. Today, increasing payouts for senior retirees will be funded by fewer young workers as time goes on. Social security will eventually collapse,  talk about a Ponzi Scheme! I’ll get into the details of the Social Security mess next time…