What happens when a country’s debt level rises and its population ages at the same time? Since the year 2000, large waves of people have moved into retirement in places like Japan, South Korea, Europe and the United States. In some of these places, the number of new retirees vastly exceeds the number of new entrants into the labor force.
Japan’s Aging Population
Nowhere is this more true than in Japan, which happens to have not only the world’s oldest population of any major country but also the world’s highest debt burden, where total public and private sector debt adds up to more than 400% of Japanese gross domestic product (GDP). As more Japanese citizens retire, how will a shrinking workforce be able to service that debt?
Over the past five years, the currency market has partially answered this question. The currencies of the most highly indebted countries with the largest number of retirees per worker have tended to fall, and the Japanese yen has led the decline. Since July 2016 a Japanese yen futures contract rolled forward in time would have lost almost 50% of its value versus the U.S. dollar as the Bank of Japan inflated its balance sheet to 120% of GDP, essentially trying to print its way out of a demographic and debt problem.
Mexico’s Rising Peso
In contrast, Mexico has a young population where there are roughly seven workers for every one retiree.
Moreover, Mexico has one of the world’s lowest debt ratios at only 80% of GDP, about one fifth of Japan’s.
As a result, a reinvested Mexican peso futures contract would have gained more than 50% versus the U.S. dollar and tripled in value versus the yen, owing to both the rise in the spot value of the Mexican peso as well as a positive interest rate differential with both the dollar and the yen. Debt and demographics might not move the currencies much on a day to day basis but over a period of years, population aging and leverage ratios might be among the most important drivers of FX markets.
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