You missed a big reason – the only hours they count are the ones reported, meaning that any ?????? isn’t counted. Also, not everywhere even keeps track of the hours worked, so that and the overtime people don’t report probably account for a bunch I imagine.

I hope the recent global downturn hasn’t hurt you or your hedge fund too much. From what I hear it is a tough business to be in these days.

Thanks again for your comments

Alternatively, companies could start to divest themselves of their unnecessary cash piles, funnel excess cash flows into dividends, and give retirees a place to invest their money for yield. I can dream..

P.S. I run computational stat arb for a hedge fund – which arguably makes me the least qualified person to be discussing macro-economics

I will attempt to respond to your specific point below:

1. Productivity – I agree that GDP per capita is not the best way to measure productivity. I was trying to keep things simple but I agree either GDP per hour worked, or labour value-added per hour worked are better measurements of productivity.

When I first looked at the data you presented I assumed the low value added per hour worked was somewhat offset by the fact that many Japanese workers work long hours (many of those hours are really not that productive). However, I found data from the OECD that seems to contradict the idea that Japanese workers work especially long hours: http://en.wikipedia.org/wiki/File:Yearly_working_time_2004.jpg.

The strange thing about this, is that it totally contradicts my own anecdotal experience living in Japan. From my experience, Japanese workers work long hours with many of the hours worked not being particularly productive. The only explanation I can think of for the discrepancy is due to the increase in part-time jobs in Japan.

In any case, if labour productivity in Japan is low it means the problem is even greater than I originally stated. With a shrinking workforce the only way Japan can keep its economy growing is through increases in productivity. And it seems – at least from the data – that Japan has longer way to go than I originally thought.

2. Debt:GDP – I had a chance to read the article you cite after you posted a link to it in your comments to my first post. Assuming the net debt numbers are accurate, it would certainly seem to indicate that Japan’s debt situation looks much better than the more conventionally estimates I use.

Now I will just point out that most of the literature on this subject tends to use the gross debt figures (the ones I used) instead of the net debt ones. Thus, for simplicity sake I decided to stick with them but I urge anyone interested in this issue to look at the article Chris mentions and make up your own mind.

Finally, even if we use the net debt figures we still have the two following problems. The first is that Japan is still running a large deficit, which (I assume) is adding to both gross and net debt. The second is that Japan’s debt per worker is also increasing due to the declining workforce. So, even if the figures today aren’t as bad as the gross debt ones would have you believe, they are still not heading in the right direction.

3. Debt costs – You are right that interest rate on existing debt is already known and will not change. However, my concern is that to a large degree Japan’s debt has been financed largely through savings from Japanese citizens. As more of them age and start to retire they are going to start pulling out their savings and spending it on their retirements. This means less money available for future bond issues which could push yields up and mean higher borrowing costs in the future. Also, there is the potential risk people could at some point lose confidence in the Japanese governments ability to pay back the money it has borrowed. If this were to happen it would send yields much higher deflation or not.

4. Labor-Capital ratio – I agree Japan has been a leader in offshore production, which has probably been good for the overall economy – but not as you say for younger workers. The problem is certain types of jobs (such as doctors, construction workers, policemen, etc.) can’t be easily offshored. This means they will still have to do more with fewer people and automation will be the key.

5. Population density – I agree with you in the short to medium term. From what I have read there seems to be a strong indication that the move from the countryside to the cities will continue for the foreseeable future. However, if Japan does indeed have 27 million fewer people in 2050 some of this decline will likely come from cities as well (maybe 2nd-tier ones?). Keep in mind Tokyo’s fertility rate is the lowest of any prefecture at just 1.09 children per woman (http://search.japantimes.co.jp/cgi-bin/nn20090604a2.html), so growth has to come entirely from people moving there from elsewhere.

Thanks once again for your comments. I really enjoy discussing these issues.

We seem to agree that the aging population is going to make some waves, and the sooner the better- the only difference is that you see it as the main problem whereas I see it as a problem for sure, but more of a pending impetus that should (hopefully) spur them into acting on the bigger issues that are becoming harder and harder to avoid such as those CJW pointed out.