Japan’s big win: Dealing with demographics
There is a lot to be learned from the way Japan’s policymakers have tackled the issue of an ageing population, says Robert Tipp, managing director, chief investment strategist and head of global bonds at the US$838 billion PGIM Fixed Income.
Regardless of Japan’s aggressive bond buying schemes and indebtedness, Tipp told delegates at Investment Magazine’s Fiduciary Investors Symposium, that Australian investors fail to appreciate that Japan is a world leader in savings which gives the nation more flexibility as its population ages.
“In Australia, you recognised that that people won’t save in advance of retirement; they had to be forced. In the US for instance, that lesson was not necessary learned,” he told conference-goers.
Tipp pointed out that while Japan has an ageing population, productivity is high and GDP per capita is rising. Unemployment in Japan is generally low, now 2.5 per cent, he said.
Plus, he went on to say, Japan has learnt to reduce bond purchasing since zero yielding or negative yielding coupons are bad for savers.
He told the conference that while inflation around the world is coming down, it is not necessarily the result of policy failure. He added that economies with an aging population and a shrinking work forces – like US and Europe –should expect to have low or no inflation.
“We have exhausted monetary policy,” he said. Central banks should not assume that they can combat inflation with low rates and with quantitative easing (QE).
“In fact, they may be creating problems through negative rates and QE.”
Turning to Australia, the PGIM executive said by slashing interest rates too aggressively, Australia’s central bank risks pushing too much capital into property which will further inflate housing prices rather than stimulate growth.
“Australian monetary policy is too much,” he said. “It acts it acts as a disincentive to save, inflates the real estate market, creates discontent and pushes people towards populist politicians.”
Tipp also warned against stimulating growth through fiscal spending on say, infrastructure projects. “Trying to kick-start the economy through fiscal spending might boost growth temporarily but it may worsen the problem and you shouldn’t do it in a developed country,” he added.
Referencing New York’s JFK airport, which he conceded was shabby, he said “it is hard to see the need to refurbish a multi-billion airport if all it does is to get people home to watch Netflix shows 20 minutes earlier.”
Also speaking at the conference, Allison Hill, the investment director at QIC, said the call for targeted fiscal policy to stimulate growth was loud and clear from the US, European and Australian central banks.
“There certainly is a lot of noise from the central banks about fiscal policy or some kind of modern monetary theory (MMT) tax incentive for corporates to invest in infrastructure assets which do have a positive economic rate of return,” she said.
Hill added there was potentially more that can be done on the interest rate front and from QE, before Australia turned to something like MMT. She reminded delegates that what we call unconventional monetary policy could well be considered conventional policy since “we have been in a low rate environment for a long time and it’s possible we could be at zero or even lower for a very long time.”
Hill doesn’t think Australian rates are at the lower bound and is still confident about investing in bonds “However, if the central bank continues to lower interest rates – driving them negative – we will be in difficulties. I think that’s recognised by the central bank.”
Hill said where was not expecting strong returns given the low cash rates, funds could still expect lower single digit real returns.