Make Japan Great Again

Predicting the future may seem tough. But there are some useful indicators to help you along.

By far the most reliable economic indicator is the Australian Curriculum, Assessment and Reporting Authority. It decides which foreign languages get taught in our schools. And it has a spectacular track record of getting them disastrously wrong.

Whenever a particular language is added to the curriculum, that signals a peak in prosperity for the poor country chosen to feature.

Thus, another generation of Australian school children is cursed to learn the language that’s about to fade into economic irrelevance.

When I first arrived at school in Australia, I laughed at the idea of learning Japanese. They might as well teach Greek or Latin, I told everyone.

Of course, learning Japanese made perfect sense when it was introduced into the curriculum. Japan was Australia’s key trading partner, back then. People were even worried the Japanese economy would overtake the US. And Japanese property investors flooded the Gold Coast looking for cheap real estate.

Because all Australian children grow up wanting to be real estate agents on the Gold Coast, learning Japanese made them happy.

But just when the first generation of Aussie kids popped out of school more or less fluent in Japanese, the Japan bubble burst. The Japanese economy went into a tailspin. The lost decade lasted for decades.

Things got so bad in Japan that, these days, Aussie tourists flood the place because it’s so cheap. Rental yields for property investors in Japan are measured in double digits, while mortgage rates were below 1% not long ago. Australians can buy a Japanese house for the price of a deposit back home.

Aussie schools also liked to teach Italian. I could never work out why. Italy was the only country without economic growth since the euro launched…

While I was at school, there was push to teach Indonesian. Indonesia was going to be our key trading partner of the future, we were told. Just look at their population size!

Sadly, Indonesia’s economy never really took off as expected. Last year, they only cracked the top 10 amongst our trading partners. Hardly worth learning the language for.

Just after I left school, Chinese became the next big thing. Again, it made sense at the time.

China is still our largest trading partner and the largest economy in the world by some measures. Not to mention their population size.

But if ever there was a time to learn Chinese, it was when the Australian Curriculum, Assessment and Reporting Authority was busy convincing everyone to learn Japanese instead. They hopped onto the Chinese bandwagon about 30 years late.

Once Chinese classes were rolled out across Australian schools, it didn’t take long for China’s economy to wobble.

Documentaries about ghost cities, manufacturing overcapacity and suspicious commodity stockpiling began to pop up.

Australia challenged China on its human rights abuses and the COVID pandemic. We got slogged with trade barriers for our trouble.

Since then, the country has descended into a de-facto dictatorship.

Investing into China is notoriously difficult. Getting your money back out is a nightmare, whether you speak Chinese or not.

Lately, President Trump has been doing his best to knock China off its perch. We might get hit by US tariffs for trying to sell our resources there.

And there’s even speculation the Chinese population is far smaller than statistics suggest.

My colleague Brian Chu is polishing off a series of articles about China’s coming economic ‘capitulation’. The Australian Curriculum, Assessment and Reporting Authority may have done it again.

So, which language is next? Will our children be learning Hindi soon?

I hope not. India has plenty of room to grow its economy before our trusty leading economic indicator signals an imminent economic crisis.

If I had my way, we’d pivot back to where we started: Japanese.

Here’s why…

Japan votes for Japexit

Japan held an election on Sunday. It featured a controversial new party leader at the head of the long-standing incumbent party. She faced off against a rabble of odd smaller parties that I can’t quite get a grip of.

But they don’t matter anymore. Japan’s iron lady grew her party’s control of the lower house of parliament into a supermajority.

Her party won so many seats that it ran out of politicians to take them all up! 14 seats were ceded to other parties as a result of the shortfall.

The supermajority is a very important threshold. It allows the ruling party to override the upper house of parliament. And to propose amendments to the post-war constitution, which has never been amended.

That constitution was imposed on Japan by the Allies. It was designed to keep Japan bottled up and pacifist. So the prospect of amendments to the constitution imply a major shift in Japanese policy. One that hasn’t been on the table in a generation.

Whatever political desires have been lurking in Japanese minds are about to be unleashed. The country has the opportunity to govern itself again. It can get rid of arbitrary constraints. We’re about to find out what Japan really thinks.

It sounds a bit like Brexit!

Which begs the question…

What does Sanae Takaichi
have planned for you?

Japanese people only ever communicate between the lines. So it’s rather difficult to figure out what the new government’s policies will be. Let alone any coming amendments to the constitution.

Getting rid of Japan’s pacifism is on the table though. Japanese defence stocks are surging as a result.

The stock market is happy with whatever is coming too. The Nikkei 225 opened up 5% on Monday.

But here’s the shift I find most interesting. Conveniently, it’s one that’ll make you sit up and listen too. Because the same topic is dominating Australian politics right now. Not to mention most other Western-style democracies.

Japan is in the midst of an anti-immigration outburst. Catering to it is how Takaichi won her supermajority.

Japan is about to attempt to deal with demographic decline without opening the immigration flood gates. How the country fares will be a leading indicator for many others facing the same demographic cliff.

But there are two other reasons why Australian investors should be paying attention to Japan right now…

Japan finances the world

The Japanese economy may be a basket case. But its export sector is very successful.

As a result, Japan has accumulated vast holdings of foreign assets. Assets it could decide to sell out of if it needs cash to deal with demographic decline and too much government debt back home.

Long before Japan goes into a fiscal crisis, it will be selling European and Australian government bonds. We’ll feel the pinch before they do.

Secondly, Japan’s ridiculously loose monetary policy was used by traders to access cheap funding. They’d borrow in yen and invest in dollars, pounds and euros. The difference in interest rates was their profit margin. This play is known as the yen carry trade.

Lately, inflation has been creeping up in Japan. And interest rates with it.

If the yen carry trade ends, that could undermine demand for all sorts of investment assets around the world.

So, Japan presents both risk and opportunity. On the one hand, the country is about to take control of its own destiny for the first time in living memory.

On the other hand, it threatens to rug-pull demand for financial assets around the world.

Which will it be? Boom or bust?

Of course, Japan isn’t the only country that has already embarked on such a shift. In the US, president Trump is busy trying to reset the American economy’s relationship with the world too.

Part of his plan is to unleash the vast natural resources that environmentalism has kept locked up for decades. I’m expecting the same is coming to Japan soon too.

But for now, investors can profit from Trump’s promised Birthright.