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Global Economic Update

During the decade of “Abenomics” stimulus in the 2010s, a big mystery in the Japanese economy was why the rapid aging of the population did not push up the wages of working-age workers. Nearly one-third of the population is 65 years of age or older. According to theory, pensioners will definitely start to deplete their assets, first spending on dining out and traveling to golf courses, and then eventually with their health. Failed to start paying medical expenses.

Such expenditures will translate into labor demand for a shrinking group of young workers. This, in turn, will push up wages across the board, and then these rising wages will push up prices and help the Bank of Japan stubbornly achieve its 2% inflation target after years of hard work.

The underlying idea—the aging population has reached a point where retirement savings will lead to increased spending and labor demand—is the core of the argument put forward by economists Charles Goodhart and Manoje PradhanThey proposed that the demographic reversal will transform the current era of stagnant prices into a new era of inflation.

However, so far, this situation has not happened in Japan. The demand for labor has definitely risen: every applicant in a nursing home in Japan has nearly four open positions. But even when the economy was at its strongest around 2018, this demand never translated into higher wages, inflation, or interest rates.

A sort of New article Written by economists Adrien Auclert, Hannes Malmberg, Frédéric Martenet, and Matthew Rognlie, it implies that Goodhart and Pradhan’s theory is wrong and that the shortage of young Japanese workers will not quickly become inflation.

It adds a lot of evidence to show that factors such as demographics depress long-term real interest rates (usually defined as nominal interest rates minus inflation), which has a profound impact on investors and central banks around the world.

Auclert and colleagues believe that yes, the elderly population will deplete their savings. However, aging will also reduce growth, thereby further reducing investment demand. Therefore, when the population reaches a certain average age, interest rates will not reverse.

If this argument is correct, then the decline in interest rates that has characterized recent decades is not over yet. Based on the current population forecast, the results of the paper show that from 2016 to the end of the 21st century, aging will drag down real interest rates by one percentage point or more.

It’s not just the demographic data that has new evidence of the force driving the decline in interest rates. In a paper published at the weekend virtual Jackson Hole Federal Reserve meeting, Chicago professor Amir Sufi Proposed new research This shows that the impact of rising inequality on interest rates even exceeds that of population aging.

The mechanism by which inequality causes interest rates to fall is well known: wealthy households have higher savings rates, so when they get a larger share of total income, overall savings will rise. More savings relative to investment will lower interest rates.

Sophie and his co-authors pointed out that the savings rate varies with income, but also with age. Even among American baby boomers, the top 10% of people with the highest income have a higher savings rate than previous generations, while the other 90% The personal savings rate is lower. This shows that inequality is a bigger factor than demographics.

The effects of demographics and inequality may actually be relevant, because the more savings a retired family has at their disposal, the fewer assets they need to pay for care or sailing in the Mediterranean. But whether it is inequality or demographic structure is the greater cause, there is little sign that these two trends are about to reverse.

For investors, the downward pressure on real interest rates is a reason for expected asset prices to remain high and future returns low. In addition, an interesting implication of the demographic model is that different aging patterns may cause new imbalances in current accounts around the world.

This means that as China ages, China’s net foreign asset position will increase in the next 30 years, but it will be offset by the US deficit. In the second half of this century, as the demographic structure begins to change, India’s foreign assets will also rise sharply, partially offset by the decline in Japan and Germany—by then, their history will be as old as they are.

For Federal Reserve Chairman Jay Powell, this relentless downward pressure on real interest rates is another reason for optimism about the recent rise in US inflation. In his Jackson Hole speech, he stated that these long-term factors are more likely to “continue to put pressure on inflation as the pandemic becomes history” rather than weaken.

Generally speaking, for the central bank governor, this strengthens the reason for raising the inflation target, thereby raising the nominal interest rate, so there is more room to cut interest rates when the situation is not good.

Going back to Japan, where the prospect of achieving any type of inflation target is as distant as ever, is bad news for young workers. If there are fewer jobs in factories and construction sites, there is no benefit to more jobs in nursing homes. It seems that this is what the future looks like.

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