Why Japan Is Doomed and the United States Will Soar

Why Japan Is Doomed and the United States Will Soar

Stock market analysts long believed that demographics are destiny. This means fast growing populations provide markets tailwinds. Slow growth or declines in populations are inconsistent with strong bull markets.

Japan provides an example of the latter. Japan’s population decline: corresponds to a weaker economy. 

The chart below shows population growth of the United States (the red line) and Japan (the blue line). The population in Japan is decreasing and has been since 2010.

Source: Federal Reserve [1]

Demographic Trends Correlate With Stock Market Trends

Stock prices are forward looking. Since investors knew about the decline in Japan’s population years in advance, the decline was reflected in stock prices long before it happened. The next chart shows that stock prices in Japan have been in a bear market for the past 30 years.

NIKKEI Stock Average 225

Source: Optuma [2]

The Nikkei Stock Average, a benchmark index for Japan, peaked in December 1989. This simple fact offers two important points for investors:

First, the chart dispels the myth that stocks are the best investment for the long run. Investors in Japan have suffered decades of declines or low returns. The same was true in the United States where decades of low returns followed market peaks in 1929 and 1966. U.S. investors suffered a lost decade in the early 2000s as well.

This indicates buy and hold strategies focused on the long term do not offer guaranteed returns.

Second, is the fact that demographics cannot be ignored. Japan’s demographic decline is one reason for the stock market’s performance.

Economic growth requires increased output and in general terms two factors explain the majority of any increase in output – people or technology. Without population growth, growth depends on improvements in technology and technology is a double-edged sword. While new technologies do create jobs, new technologies also destroy some jobs.

Looking Ahead for Investing Opportunities

Based on population growth, the future looks grim for Japan. The Japan’s population decline will continue and is expected to drop by a third by the turn of the century.

Population Pyramid

Source: PopulationPyramid.net [3]

Meanwhile, the population of the United States is expected to increase by more than a third over that same time.

population since 1950

Source: PopulationPyramid.net [4]

Looking beyond these two countries, population in Europe is expected to peak in 2025 and then decline by about one-third by the turn of the century.

Asia’s population is expected to peak near 2055 and end the century about 10% above the current level. Central America and South America are expected to show trends like Asia’s.

Demographics is just one potential source of economic growth, but it is an important one.

A 2010 study explains why population growth is important to investors [5]. In Economic Growth and Equity Investing, Bradford Cornell explained,

“…consider a hypothetical example of an economy for which technological innovation – and thus productivity growth – is zero but which is experiencing 5 percent population growth. Companies that provide goods and services in these economies will, on average, experience 5 percent growth in real revenues. Assuming that their margins remain constant, this rate translates into 5 percent growth in real earnings.”

Long run forecasts for population growth should then logically be factored into long run stock market expectations. Of course, Cornell’s example uses the economist’s assumption that “all other factors being equal” which is never the case.

Other factors, like technology and investor sentiment, will change. This means population growth should highlight which markets are relatively more attractive than others. Relatively attractive markets deliver larger gains than less attractive markets.

Based solely on demographics, the U.S. is the most attractive developed economy in the world.

As developed economies, it is likely that technology will affect Japan, Europe and the U.S. in similar ways. That means the difference in population changes will provide more economic growth to the U.S.

For investors looking beyond the U.S., emerging markets should be considered, especially markets in Africa.


Michael Carr, CMT, CFTe

Editor, Peak Velocity Trader



[1]: Federal Reserve Bank of St. Louis – Economic Research

[2]: Optuma

[3]: PopulationPyramid.net – Japan

[4] PopulationPyramid.net – United States

[5]: Financial Analysts Journal – CFA Institute (subscription required)

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