Shifting Demographics, Debt and Currencies: Part 2
In our previous paper, we examined how the currencies of the most highly indebted countries with the largest ratio of retirees to the working age population tended to fall versus those with less debt and younger populations. In particular, we looked at the two extreme points of the demographic and debt spectrums, Japan and Mexico, and how Mexican peso futures contracts outperformed yen futures contracts. In this paper, we explore the state of the rest of the world as we head into the second half of the 2020s.
China’s 2024 demography is remarkable in that it looks nearly identical to Japan’s 20 years ago (Figures 1 & 2). What this might imply is that in 2044, China could look a lot like Japan today.
China and South Korea: Are they headed down the same path as Japan?
Figure 1: China’s 2024 demographics look nearly identical to Japan 20 years ago
Figure 2: Japan might be a harbinger of China’s future
China is the only country in the world whose central bank policy rates are lower than from two years ago (Figure 3). Moreover, it has also reduced its reserve requirement ratio and has allowed its currency to fall versus the U.S. dollar (USD) (Figure 4). This has taken place as China’s debt-to-GDP ratios have soared past those of Europe and the U.S., although they remain below those of Japan (Figure 5).
Figure 3: The PBoC is the only central bank in the world to have lower rates than two years ago
Figure 4: As its debt increased & population aged, China has been allowing a weaker currency
Figure 5: China’s debt-to-GDP ratios have soared past Europe and the U.S.
Meanwhile, South Korea has the world’s lowest birth rate, which has fallen well below replacement levels. Its population isn’t as old as Japan’s yet but it’s ageing rapidly (Figure 6). Meanwhile, debt levels have increased sharply (Figure 7). The Korean won has weakened significantly versus USD in recent years (Figure 8).
Figure 6: South Korea’s labor force is set to shrink considerably
Figure 7: South Korea has more debt than U.S. and Europe, and nearly as much as China
Figure 8: South Korea’s exchange rate has weakened amid falling birth rates & rising debt
The Eurozone: Also beginning to look like Japan
The Eurozone also resembles Japan in terms of demographics. Austria, Germany, Greece, Italy, Spain and Portugal have Japan-like demographics while countries like Belgium, France, Ireland and the Netherlands fare a bit better. Still the demographic picture is worrisome (Figure 9).
Figure 9: The Eurozone has a massive bulge of workers aged 50-60 on the cusp of retirement
