 Welcome back to Think Tech and we are now doing Japan and looking to the future of the USA. I'm looking to the East with Steve Zercher. He's in Kobe, Japan and he's a teacher there at Kansai Gadaei University but he also comes around through Hawaii and teaches at the Shidler College. And mostly it's about business and entrepreneurship and economics and it's a perfect day to catch Steve on that subject. Welcome back to the show Steve. Always my pleasure Jay, thank you very much. Yeah, you sound great. Okay, so let's talk about it. We have a number of slides and we want to compare the dynamics of the Japan economy with the dynamics of the American economy and see how they work together these days and now one will affect the other. Okay, tell us about it. Right. Yeah, since I live here and teaching business and entrepreneurship as you noted, I keep up with economic trends here. My first visit to Japan was back in the 1970s. I'm giving away my age. So I've watched Japan develop from out of the ashes of World War II to become the number two economy in the world and then most recently to go through a long period of stagnation. So it's really, it's not covered all that well in the United States, but since I'm here, I follow it quite closely. And there's some striking economic trends that are occurring in Japan. But as I look back to the United States, some of these things that are occurring here in Japan are also occurring in the United States, but they're also not well understood perhaps or not well discussed. So that's a topic for the call today for our Looking to the East show. I think we should all be interested because we should all be interested in this because there has been talk over the past few months in the Trump administration about how we might have a global recession on the horizon. There's not necessarily limited to his actions, but maybe trends in the world, trends in Asia, trends in Europe, and trends in the U.S. So it's very important for us to understand how the global economy is doing and how it will be doing and how the connection is going between Japan and the U.S. Right. Yeah, Japan is teetering on the edge of a recession right now and most business people are forecasting. They do a survey of the business leaders periodically and they're beginning to indicate that Japan will be moving into a recession maybe in the next quarter or two or maybe even Q4. There'll be negative growth. But before we get into that, just very briefly, Jay, I want to mention that this week there was a major meeting in Bangkok of a regional trade organization. It's called RESEP, the Regional Comprehensive Economic Partnership. And this is the counterbalance that China created in response to the initiative that the Obama administration has focused on the TPP or the Trans-Pacific Partnership. So Obama, as you remember, did a pivot looking away from the Middle East or the United States for decades. We have focused our energies and unfortunately been involved in wars, some of which we started. So Obama said, no, Asia is really the future because that's where the economic growth is and began to strongly support the TPP. It was not originally a U.S. initiative, but it became one because Obama endorsed it in the United States economy as number one in the world. So China as a counterbalance came up with their own economic association because in the TPP China was exclusively excluded. So as you know, Trump in his first few days withdrew from the TPP because he said that it was not in the United States best interests. And that gave a huge boost to this Chinese trade consortium, which is now gaining momentum. And they just finished their major regional meeting in Bangkok. And the results of that were fairly positive overall. India is still somewhat reluctant to join because they're afraid of influx of Chinese goods. But many countries now are committing to this regional partnership because there is kind of an absence of the U.S. on this broader multilateral trade front with withdrawal from the TPP. In fact, he represented the United States in Bangkok for, I think, third level people. For example, Prime Minister Abe went and President of Korea went and the trade minister for China went. They had all high level people, but we didn't send anybody. So it's a clear signal from the United States that this regional trade organization is not something that is a high priority. And the second factor is the tariffs that are going on between China and the United States. And you're very aware of that, Jan. No, I think most of your viewers or listeners are. Excuse me. So the countries look at that and go, my gosh, this could happen to us. So how do we protect ourselves? And that's making a push for countries to be more invested in this Chinese trade association, trade collaboration. If you could address two questions that come to mind, Steve, about the, what is it, ReCEP conference and the whole notion of a, you know, a competition to the, what is it, PAM Pacific partnership? Is this, one is, so this strengthens ostensibly China's position. These are the other countries, even countries that are distant. So what's the connection between ReCEP and the One Belt, One Road initiative? Is China, is China trying to enhance its opportunities on One Belt, One Road with ReCEP? Or are they different? Yes. I think it would, you could consider it to be a part of their overall strategy. Creating a major wide trade association where tariffs are reduced for member countries would encourage trade among those countries, as you know, it's the case with the EU and also with NAFTA. I mean, there's so many examples of regional trade organizations being effective. In that regard, so that's in China's best interest. And to some extent now it's in the interest of the member countries. I mean, I think it's in the upper 20s. There's a lot of countries that are involved in that. So, yes, I think with this forward momentum, with this gaining greater prominence, with the withdrawal, let me ask you my second question. You know, it occurs to me that if China and the other members of ReCEP have what they want or have what China wants, that's going to be, you know, a valuable asset to their economies, as TPP was supposed to be a valuable asset to, you know, the economies of the members who were involved. But it strikes me that in the U.S. by becoming isolationist is writing its own epitaph in the sense that our economy cannot be as strong if we don't collaborate with other countries. If we're not a global player, that's ultimately going to undermine our economy. And I think that's just a general matter of economics, as we know economics. But what's happening seems to me is that this isn't necessarily in itself going to bring a global recession or worse. But it's going to, at the end of the day, these moves, that's Trump's isolationism, and China's efforts in One Belt, One Road and in ReCEP are going to be a rebalancing, a rebalancing of the world economy. And the countries that are involved in ReCEP will be stronger and the U.S. will be weaker. What do you think about the notion of rebalancing? Yeah, I totally agree with that. In one of my classes, I show a slide of the historic contribution of Asia to worldwide GDP. And for the last 2,000 years, Asia economically through India and through China primarily has dominated. It's only with the communist revolutions and so forth that the economic contribution of China and India and others is down to where the U.S. and Europe dominated economically. So the growth, as Obama noticed, and all economists, and I tell my students in my classes all the time, the growth is here in Asia. And the United States, if it wants to ensure its future economic opportunity, it needs to do a better job of connecting to this region in various ways. And multilateral agreements are much more preferable. I think economists recognize that and individual countries recognize that. If you are at Burma and you have to do 20 separate individual negotiations with all of these countries, that's just unbelievably burdensome and maybe even bordering on it possible. But if you join a regional trade organization, it's just one agreement. It may be more complicated to actually negotiate that, but then you just do it one. It sounds more efficient. It sounds in general more efficient. And that's what counts in economics. All of these one-off types of free trade agreements, it's called the economics. Economists call it the newable. I mean, you have all these captured-in-time agreements with separate countries, and sometimes they begin to work against your own best interests. But as you point out, Jay, unfortunately, maybe because of his real estate background or whatever, Trump feels that the best negotiations are one-on-one. And that multilateral, these regional organizations make the US worse off, which is not true based on the data and what most mainstream economics think. So, for example, Trump withdrew from the TPP, and now he's done a free trade agreement with Japan. He's kind of forced Japan to do that. We still don't know all the details, but as far as I've heard through my connections, what he's gained through that agreement and one-on-one free trade agreement between our states and Japan is exactly what he would have gained anyway if he just stayed in the TPP. Well, let's take a moment and get back to the principal topic of the economies of Japan and the US and how they compare. I know you have a number of slides that will help us understand the comparison. Why don't we look at those slides now? Yes, let's go ahead and pull up slide one. I want to look at three areas. I want to look at demographics, which is obviously a big issue here in Japan, and then also look at debt, which is a big issue here in Japan, and then also deflation. So, the first slide, this is a rather dark look at the dwindling population in Japan. And we talked about this, Jay, previously on our calls, but here you can see the population peaked in the early 2000s at 127 million. It's about 125 now. And you can see how it's going down precipitously. Japan is called the Super-Asian Society. The number of people that are over 65 is well over a quarter of the population now. This particular slide projects Japan's population in 2105, that's 44 million, which would be one-third, approximately one-third of what it is today. So, that is what Japan is looking at and responding to this. Well, the Abe administration recognizes that this is the problem, but it's a tough one to deal with. So, what's behind this? If we go up to slide two, it's a dwindling of the fertility rate. Obviously, when a couple gets married, in order to replace themselves, they need to have at least two children. Statistically, it actually has to be 2.1 because of its investment and so forth. But Japan's fertility rate, as you can see, is going down. It's actually below the sustainable number, quite significantly, in the 1.4 range. And that's been pretty consistent now for quite a while. So, that's what's driving the population going down is that couples are not getting married, or when they do get married, they're either not having children or they're having just one. Most of my son's friends are single children. Very rarely do you see a family with more than two kids, like three or four. If you have a family with five kids, that's like, what's going on? That's really, really strange. What's going on with the death rates? So, you have a death rate there. That is increasing. What is that about? Yeah, Japan is aging. So, the more and more people are dying, right? Because they're getting into their 80s and 90s. Japan is one of the most healthy societies in the world. I go to a sports club, and the average age is probably 70, because these people are amazing in terms of staying fit. There was a statistic just a couple of weeks ago that 70-year-old people in Japan are stronger in 2019 than they were in 2018. So, they're very healthy. I know, isn't that amazing? But I believe it, because I see these people working out almost every day at my sports club, more often than I do for sure. But Japan is getting older, so as people go into their 80s and 90s, obviously they begin to die off, and there's more people dying now than are being born. Okay, let's go on to the slides now, because we're going to run out of time. Yeah, we took a little bit too much time, but anyway, so let's look at the U.S. The U.S. is actually experiencing the same thing, not quite so dramatically. The birth rates right now are below the death rate in Japan. I'm sorry, I'm sorry, in the United States. So, the statistic for couples, children is 1.4 or so in Japan. It's actually 1.8 in the United States. So, the United States right now, the population, if it wasn't for immigration, would actually be shrinking as well. And I don't think most Americans recognize that or understand that. These statistics for aging in Japan are beginning to show up. For example, I read recently in Maine that they also have a quarter of their population over the age of 65. So, in some states, maybe more rural states, this aging phenomenon is occurring. So, the next slide is kind of the ah-ha slide. So, as I mentioned, the United States population is actually holding steady or it's going up incrementally and that is because of immigration. So, this next slide, the U.S. population with and without immigration, is shocking. Look at this, Jay. If it wasn't for immigration, our population would be one-third of what it is right now. This country was formed on immigration and it continues to be sustained on immigration and that's true as of today. Now, you know, this addresses the issue of it becomes so politicized in America under the Trump administration with the immigrants and the economic value that they provide and so forth. But clearly, in the United States, as of today, as of 2019, without immigration would begin to shrink like Japan is. So, that's a commonality. Well, the unspoken thing here, the unspoken thing is that you need to have growth in population to have a growth in the economy. Am I right about that? Yeah, I think economists, that's kind of mainstream thinking. If you don't have demographic growth, then how do you grow your GDP? And I think Japan is experiencing that because Japan's growth in terms of population is now shrinking and the GDP has been pretty much flat. So, those two things are very strongly related. It may not be one-to-one. So, I don't think it's one-to-one but it's certainly a major contributor to the fact that Japan has not been growing economically. And if that trend takes hold in the United States and the United States population begins to stabilize or even, let's say, Trump wins again and cuts off immigration entirely, the United States population begins to go down, the United States will face the same problem that Japan has been facing for the last 10 years. Let's move on to debt. The next slide is Japanese debt, which is famous, right? So, Japan's percent of public debt as looking at it from the comparison to the GDP is at Greek levels or even higher, right? So, Japan's debt is massive. It's public debt is massive. And under Abe, it's growing significantly. Jim Rogers, the famous investor, the investor biker, I don't know if you know him, Jay, but he was in Japan just recently and he's forecasting serious ramifications for Japan because of this massive debt that Japan has been growing and continues to grow. So that's fairly well known, well understood, and Jim Rogers has written books about that. But let's look at the United States. It also has a debt problem, right? The U.S. debt, if you look at the next slide, slide number six, you can see total debt versus percentage of GDP. Now, it's not quite as dramatic as the United States. It's not at a 200% level. And it's edging into 100% level. And if we take a look at this in, rather than in current dollars, we take a look at it in terms of $2014, the percentage of debt actually does increase the, it does increase to the Japanese level almost at 180%. That's the red line going up there on 180%. And as you know, if you're following the current debt for 2019, the budget office or the United States government is forecasting a $1 trillion debt in 2019. And that's driven primarily by the tax law that Trump and the Republicans passed a couple years ago now, I guess it is. I'm reducing taxes. So the U.S. debt is going to be increasing by a trillion dollars a year over the next few years. So again, Japan has this debt problem and it's trying to address it. It just recently raised the sales tax here from 8% to 10% as a way to counterbalance that. I don't know if that's going to work or not. But that may be actually another trigger to push Japan into recession. But the U.S. at some point will have to take a look at this massive government debt that's being accrued because it will also put the U.S. economy at risk in the same way Jim Rogers has seen the Japan economy potentially at their risk. So that's debt. Jim, do you have any questions there, Jim? I'm moving pretty quickly now. Certainly. What are the factors? What are the processes by which Japan's economy affects the U.S.? And the U.S. economy affects Japan. I mean, we have been since the war, tied at the hip. But what are the processes that happen? I mean, if Japan's economy goes down, how is that going to make ours go down and vice versa? Yeah, if Japan goes into a recession, consumer economic activity, which is a majority of economic activity, around 80% or so of economic activity is driven by domestic demand. So if that begins to tail off, if the Japanese consumers begin to get more conservative and it's kind of leading towards that right now, and the consumption of American goods potentially could go down. So that would have a negative impact on U.S. economic activity, and that the Japanese people would be buying fewer American goods potentially. Now, the free trade agreement that was signed between Trump and Abe, hopefully will counterbalance that somewhat, but it's hard. If the Japanese economy goes into recession, then the amount of consumption will go down, and that would include American products as well. So there's one link that way. Well, will this RCEP trade agreement save Japan from negative effects that it might otherwise have from the U.S.? Yeah, that's a very interesting question. Japan, of course, is very strongly aligned with the United States politically. I mean, they're really like in-staffed. There's very little that Japan does that's outside of what America is doing, in terms of foreign policy and economic strategy and so forth. But Japan's number one trading partner is not the United States. China, and it has been now for almost a decade. And Japan also recognizes that Asia is the growth opportunity. Europe is probably not the United States. So Abe and the Japanese leaders are kind of caught between their political alliances and historic relationship with the United States coming out of World War II. And the reality is that Asia is the growth opportunity. So Japan is a member of RCEP, and will continue to be, and will be contributing member for that. It has to do that because it cannot exclude itself from this regional trade agreement. But it does put them at odds somewhat politically to the United States. The United States is not going to say Japan don't be a member. That would be too blunt. They can't do that. But it does put Japan in somewhat of a bind. Well, it strikes me that if Trump could get elected again, he could avoid the impeachment and get elected and continue exactly the same policies and see it as a mandate, isolationism and all that. And from what you describe, it sounds like that will turn Japan further west. It will turn Japan into the RCEP. That will make Japan more dependent on China, more engaged with China and the rest of Asia. And I suppose the question is, assuming that happens, and taking due regard to the fact that Japan may be in for a recession here, can we avoid a world recession? In other words, can Asia keep the world out of recession? Or are we bound for a recession, if not by other factors than by the factor that the U.S. is still the biggest economy and the U.S. is heading for a disaster if Trump keeps continuing his isolation and trade war policies? Right. Wow, that's a huge question, Jay. It goes beyond my slide, that's for sure. China is the number two economy and the most economist field that eventually China will be, nominally the number one economy in the world. China has its economic challenges, but its growth rate is still at 5%, which is easily double in the United States. India's growth rate also, even though they have some economic challenges as well, is, the last time I checked is from the 7% to 8% range. So despite the challenges, the infrastructure issues and so forth, the two strongest growing economies in the world or two of the strongest ones, major ones are here in Asia. So that might be a counterbalance to the world-wide recession. I think if we look back to the Lehman crisis as it was called here in Japan, in 2008, 2009, the world economy was shocked and went into a recession, but China was stable through that period of time. So it did, at that particular point in time, act as a counterbalance to the downward trend that the rest of the world were going through. But this is a... I don't know, there's many complicated factors here. It depends on the political negotiations that occur between China. China's causing conflict here in Asia or on a territorial basis, claiming regions of the South Pacific as their own and fighting with the Philippines and Thailand and Vietnam and others. So there are, beneath the broader trend, regional conflict issues that could upset things. But I think to answer your question at a high level, Asia could also offset a European or a US-based recession, and even if Japan is thrown into that too, because the economic growth is continuing in China, in Southeast Asia and in the region. Well, this all goes to exactly what trouble we can get into by being an isolationist. And it seems to me, from what you said, China is not ignoring this issue. China understands everything you and I have talked about. China understands the need for planning. It's a long-term planning orientation in China. And for that matter in Japan. And for that matter, all the countries of the recent trade organization. So it seems to me they would probably be trying to make themselves more sustainable, more resilient in the face of a failure by the US. And hopefully, at least for them, they can keep away from our failure by working together. And I think actually, Steve, it sounds like the future where the rebalance, if you will, the repivot is happening in Asia. And when you look again, when everything turns up again and everything is coming up roses, Asia will be the number one group of economies in the world. And Europe and the US will be the number two group of economies in the world. We're actually watching a huge rebalance right now in the making, don't you think? Absolutely. Yeah, it's been going on now for the last 10 to 15, 20 years. And it will continue into the future. And China understands it. And that they played a long game. I mean, they historically have been the most dominant country economically in the world if you look back over the last 2,000 years. It's an anomaly that they're not right now. And we'll move to that position. And they're looking beyond Trump. And they're figuring out how to best achieve their dominance. And your children, my children will be living in that world. It'll be obvious to them, even though it's not quite so obvious to Americans right now and even somewhat Japanese to try and reconcile the Japanese economic interests with their historic political interests. Yeah, well, but it will happen. CJ, I know we're running out of time. The last thing I want to do, maybe we can just get to slide 10. I want to also take a look at deflation, which is a chronic problem here in Japan. Consumers are buying less and less. And as a result, prices are actually negative and have been negative for quite a while. The last slide, number 10, also indicates that the United States is similar. It doesn't have a high inflation rate. It actually has neared Japan. You see the red and the green line there, the consumer price index numbers that Japan is attempting to try and fix this unsuccessfully in the last five or six years. And the United States also shares this. So from a demographic perspective, from a deflation perspective, and from a debt perspective, the U.S. and Japan actually does share these common problems. Japan's been experiencing it longer, and it's been trying to solve these things. The United States, these things are happening, but at least I don't believe, and maybe J.U. could correct me, that our leaders are beginning to address this. Like, for example, is the U.S. looking at demographics? Is it recognizing that it's an aging society? I don't think so. No, I don't think so either. Let me ask you this last question, Steve. So if we have deflation, if we have deflation, and who knows, maybe the rebalance toward Asia will affect that last chart. But assuming just we look at the four corners of that chart, and we have a sort of joint deflation between the U.S. and Japan, how does that affect the economy? What does the deflation mean in terms of the health of prosperity of an economy? Well, economics is assumed to grow. Right? So this is how we think of economic success. And when you have deflation, you lose growth. Right? So the consumer spends less. This has been the problem that Japan has been facing for now, for two decades. Consumers decide not to spend money because, logically, they recognize, well, I want to buy a car, and you know, I'm in November right now, but if I wait until summer 2020, the price will be less due to deflation. So you start this trap where consumers delay consumption and it makes the economy struggle. Yes, I see. That's the problem Japan has been experiencing now for a long time. Abe has tried to end his way out of it by lowering the discount rate. It's actually negative here in Japan by encouraging the bank in Japan to buy equities. 40% of all Japanese stocks are now owned by the Japanese government. It is unbelievable. But he did that in order to try and jumpstart the economy and have companies have this flush of cash and therefore spend it on salaries, which they have not done. Things are changing, aren't they? That is the issue. Things are changing, maybe not so much for the good. And we have to follow it. I would like to talk to you about this on a regular basis, actually. Okay, very good. So to sort of take the temperature. And of course you're coming in January. We can enjoy a show together here in the studio and that'll be great. So Steve Zurcher. Well, I'm very much looking forward to that, Jay, and also the Martini that you promised me in the last show. Yeah, I promise you that in public. So that'll be I'll make good on that promise, Steve. You'll see. And everyone will know. Very good. Steve Zurcher, looking to the east. Thank you so much. We'll see you again in two weeks. Thank you so much, Jay. It's my pleasure. Aloha. Sayonara. Bye-bye. Thank you.