Japanification” is the term used to capture this idea. It argues that demographics cause structurally low growth, low inflation or stagflation and low interest rates. It argues that decline in the number of people of working age and the ageing of the population creates downward pressure on the economy. Given the recent announcements that the Chinese population has started to shrink the analogy seems strong.

In an analysis by JP Morgan they point out the similarities between China now and Japan before decline. Clearly Japan’s population has been declining and ageing for some time. It is only recently that the same trends have emerged in China. China is undergoing housing market deflation, as did Japan. There are increasing debt problems. There is certainly an economic slowdown. However, they point out that there are enough differences for the Japanification outcome not to be inevitable. Economists have argued that the Chinese retirement age is one of the lowest and could be increased. There are still millions of potential workers in the countryside.

The exact linkages between a declining and ageing population and a decline in the economy are not altogether clear. One logical link is through the workforce. If fertility drops at some point the working age population shrinks. Working age population is one of the key drivers of economic growth (Newsletter #129). Goldman Sacks in their China review suggests a different channel. They point out that allowing for COVID the Japanese economy grew, albeit modestly, in the past decade. They argue instead for an “expectations channel”.

Demographics create a long-term decline in growth expectations. Businesses, households and individuals all reduce expectations of future income. This in turn lowers investment and all forms of risk taking.

Other bank analysts add the idea of a country suffering “Collective Trauma”. In the case of China this was the handling of COVID 19. They argue that this broke the implicit contract between the people and their government. People were left to fend for themselves. They argue that the result has been the “lying flat” generation. These young people have given up. They no longer want to compete for a shrinking number of well-paid jobs. (Youth unemployment is over 20%). They point to similar groups of young people in Japan.

The Zero-Sum Mindset

John Burn-Mudoch has an excellent "data" column in the Financial Times. His recent topic was behavioural macro-economics. He started from a paper from economists at Harvard on “zero-sum” thinking. It was published as a working paper by the National Bureau of Economics. There is a world of difference in behaviour between those who see the world as zero-sum and those that do not. If advancement requires someone else to decline then it changes motivation. If “the pie” is not getting any bigger, then why aspire?

The Harvard team had developed measures of such “zero-sum” thinking. They asked respondents to respond to alternatives in different spheres. For example global trading patterns. “Trade increases for one country can only come from less trade somewhere else”. They surveyed a very large group of Americans. They were interested not only in its incidence but its precursors. They therefore collected detailed histories and demographics of their respondents.

There is a broad range of people at different levels of “thinking zero-sum”. Being an immigrant or the child or even the grandchild of an migrant reduced the chances of being “zero sum”. Leaving ones country and starting a new life are almost the antithesis of it. This is an action full of hope. Being a descendant of a slave or even living in areas that once was “home” to many slaves increases the chances.

They could track the economic success of a family. They had three generations of information on an individual. Upward mobility in previous generations increased the chance of being positive-sum. They showed that such a mindset can come from ones own history over generations.

Burn-Mudoch was most interested in the impact of economic prosperity or decline on “zero-sum” thinking. There was a cohort effect. It seems these attitudes are determined during the first 20 years of our lives. If our country was economically depressed during that time, it is more likely that we will be zero-sum. If the economy was booming, we tended to be expansive, more optimistic and positive-sum. Economic activity in our formative years can influence our perspective.

The Harvard researchers went on to test their idea using an international survey of global values. They found the same pattern across countries. In recently economically successful countries the incidence of positive-sum thinking was higher. This obviously raises the issue of the current generations. The younger generations seem to be more “zero-sum” than their older compatriots. Is this due to the economic environments in which they grew up?

There are many negative effects associated with being “zero-sum”. Populism and conspiracy theories thrive in a world where the “pie” is not getting any bigger. Trust and co-operation both come under threat. That type of thinking may have a direct effect on economic growth.

The Dangers of Doomsaying

It is clear that we and the media prefer bad news stories. I have fallen into the same trap with this Newsletter. I have tried to be upbeat in my “knocking” of the ageing stereotype. It is still too easy to slip into the “economic bad news” mindset. We must all be aware that there is strong chance of this becoming self-fulfilling.