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Japan: A cautionary tale

By Kevin Voigt, CNN
The sun sets as the moon rises on Japan's iconic Mount Fuji.
The sun sets as the moon rises on Japan's iconic Mount Fuji.
  • The Japanese economy is crippled by deflation, deficits and aging demographics
  • One quarter of Japanese aged 20-to-30 don't have full-time jobs
  • More Japanese jobs are shifting overseas under the weight of the rising yen
  • The nation's debt is estimated to be 225 percent of total economic output

(CNN) -- As the G-20 meeting wraps up, many leaders -- including U.S. President Barack Obama -- will take a short flight from Seoul, Korea, to Yokohama, Japan, for a summit of Asia-Pacific leaders.

They are taking a flight into the feared future of the developed world.

Japan's economy is beset by the three D's that other nations long to avoid: Deflation, staggering deficits and aging demographics.

"Japan is the one facing the worst problems," says Piero Ghezzi, managing director and head of emerging markets research at Barclay's Capital.

"After Japan are the fragile European countries that are in very dire straits: Greece, Ireland and Portugal ... Spain and Italy, too, but their problems are of a different order," Ghezzi said. "After that, the U.S."

Japan PM Kan speaks
The tale of twin sisters

Leaders from 21 Pacific Rim nations are gathering Saturday in Japan for the annual APEC (Asia-Pacific Economic Cooperation) summit.

It's the first summit since China became the world's second largest economy this year, taking a mantle Japan held since 1968 when its economy soared out of the ashes of World War II. The bubble burst in 1989, and the country has achieved only anemic growth.

Japan is saddled with the world's largest government debt baggage -- estimated to be 225 percent of GDP, and forecast to grow to 250 percent by 2015. By comparison, the U.S. debt is 93 percent of GDP, UK debt is 76 percent and for China it's 19 percent.

"Japan has additional problems like terrible demographics," Ghezzi said.

The aging population means fewer replacement workers who must shoulder the burden of public debt.

"The number of young people supporting our elderly is going to be 2-to-1 in the very near future," said Kathy Matsui, chief Japan strategist for Goldman Sachs Japan. Japanese governmental figures show 40 percent of the population will be over the age of 65 by 2050.

"Unless you allow immigration, it's very difficult to reverse," Ghezzi added. "It's structural, and almost irreversible."

To be sure, Japan remains a strong economy -- although it has slipped to the third largest this year -- there are no likely contenders to knock it further back in the global pecking order in the near future.

After Japan are the fragile European countries that are in very dire straits ... after that, the U.S.
--Piero Ghezzi, Barclay's Capital

But prospects have been diminished by the steady corrosion of deflation, as Japanese consumers delay spending -- why buy today when it will be cheaper tomorrow? That has hurt the domestic job market. Once the land of lifetime employment, approximately one third of 20-to-30-year olds don't have full-time jobs, according to Japan's Ministry of Internal Affairs and Communications. The ministry's figures also show that the highest rate of unemployment is among people under age 25.

An aging population prefers deflation, which influences monetary policy, says Avinash Persaud, chairman of Intelligence Capital and an advisor to several G-20 government boards.

"Europeans and Japanese don't mind a deflationary environment," Persaud said. "Both are filled with older people, with fixed income bond investments. As a retired person on a fixed rate, then deflation is a good thing."

But it is bad for the Japanese economy as a whole and only made worse by Japan's rising yen. The credit crisis led currency speculators to dump the falling U.S. dollar for yen, causing the Japanese currency to hit 15-year highs against the dollar. That has hit export-dependent Japan hard, forcing companies like Toyota, Nissan and Sony to accelerate production outside of Japan.

In an interview with CNN's Kyung Lah earlier this week, Prime Minister Naoto Kan placed part of the blame on U.S. monetary policy. The U.S. Fed announced plans to pump $600 billion into the economy, driving the value of the U.S. dollar even lower.

"With regard to the strong yen, the basic cause is the U.S. economy was undergoing changes with everything being skewed to a weak dollar," said Kan. "Should there be excessive fluctuations in exchange markets, then we need to take resolute actions. In fact, we've already intervened in the market once. This remains an option we can take again."

But in the meantime, the younger generation has fewer expectations of a brighter future.

"Japan is a difficult place to live for young people," 30-year-old Toshiko Kubo told CNN in Tokyo. "Young people don't have goals. We can't have dreams. Even if we have a dream, there's no way to make it come true."

CNN's Kyung Lah contributed to this report

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