japaneldbFrom Foreign Policy magazine comes a very interesting article about how the aging and shrinking of Asian populations especially Japan’s will result in problems for the US. The effect of Japan’s plunging fertility rate is well documented, in terms of a shrinking working population that will be outnumbered by the retirees they support, but also in terms of the way that the shrinking tax base will affect revenues and the pressures of the aging populace will change the spending priorities of the government. But the article also points out the pressures that the US debt and finance system will feel as the decline in savings leads to less investment in American financial instruments:

Financially, too, considering that Japan’s savings has bankrolled much of U.S. spending in recent decades, the country’s increasingly elderly population is going to hit the American empire where it hurts. U.S. trade negotiators have long targeted Japan’s trade surplus with the United States, but those funds have been recycled back to America to suppress the value of the yen, finance consumption of Japanese-made goods (and support employment), and help the United States cover its steadily expanding government deficits. Until late 2008, Japan was the number one holder of U.S. Treasury bills. (China has overtaken Japan, but as of February 2009, Japan still held $662 billion in T-bills, putting it just behind China.)

An aging Japan will no longer be able to recycle those surpluses. More precisely, an aging Japan won’t have those surpluses: Its trade accounts will fall into deficit, and funds that do exist will be badly needed at home. This process is already underway as the country’s savings rate declines. According to estimates by the consulting firm McKinsey, the total savings rate in Japan is projected to slide to 0.2 percent by 2024.

China has less to worry about in terms of declining fertility rates, as the article points out most of their worries will be alleviated by a lifting of the one-child policy. And for now the savings rate of China’s populace will be very high. That will slowly change as the “consumption” desires of a wealthy and expanding middle class take hold. I personally doubt that Western values will change the hold that Confucian values have in Chinese society but the trend in Japan is clear. Is Japan’s declining savings and rapidly aging population really going to affect the wheel of finance that much? Its an interesting question. I don’t think the answer lies solely in trying to reverse the plunge in fertility rates in Japan.