Monday, 6 April 2015

Ageing South Korea and Japan have trouble boosting consumption

Bloomberg reports today that South Korea cannot get the elderly to spend their savings.

South Koreans are getting older and spending less, making it more difficult for the central bank to stoke spending and price gains to keep the nation's tiger economy powering along...

"Changes in South Korea's demographics are the key reason why rate cuts aren't boosting consumption,'' said Kim Seong Tae, a Sejong-based research fellow for Korea Development Institute. "If you think you're going to live longer and are unsure of what's going to happen in the future, there's little incentive to spend more and save less, despite the low rates."

In my opinion, the issue should not be how to get Koreans to spend more but whether they should be spending more in the first place, considering the need to accumulate savings before their retirement.

Monetary stimulus properly has little role to play in an economic slowdown that is driven by ageing demographics, as Japan is finding out. From CNBC:

Rising prices are forcing Japanese pensioners to reduce spending, undercutting Prime Minister Shinzo Abe's plan to boost economic growth and pay down the hefty public debt burden in one of the world's fastest aging nations.

"There is no solution to the structural problem: the government is running a huge budget deficit, but the only way to coax the elderly into spending more is by increasing public spending on them," said Dai-ichi Life Research Institute (DLRI) chief economist Hideo Kumano...

"The average Japanese is suffering because of a weaker yen," said Keio Business School associate professor Seki Obata, but "pensioners are suffering the most from the rising prices because there is no prospects of their incomes rising."

Indeed, Japan is already drawing down its savings. From the New York Times:

The country’s savings rate, long one of the highest in the world, is now below zero. In short, Japan’s citizens are spending more than they earn...

The national household savings rate slipped to minus 1.3 percent in the last fiscal year, according to a government report issued in December. The situation adds an extra layer of complexity to the task facing Mr. Abe...

Naohiko Baba, the chief Japan economist at Goldman Sachs, worries what will happen if both households and companies turn their backs on saving. At the equivalent of two and a half years of economic output, Japan’s debt load is the heaviest in the world...

Mr. Baba calculates that Japan could run short of the savings it needs to fund the debt locally by about 2020. After that, it would need to turn to foreign investors — a potentially destabilizing shift.

“Once we have to rely on foreign investors to finance the debt,” he said, “that could be the beginning of a disaster for Japan.”

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