I wondered why the Price Earnings Ratio (PER) of Japanese equities was so low. Here are my thoughts.
Definitions
Aged dependency Ration (ADR) is as follows.
Ageing speed (AS) is the difference in ADRs per decade (percentage point). For example, Japan’s ADR was8.2% in 1950. A decade later, it increased by 0.8% point. So the AS was 0.8 in 1960.
Aging speed = ADR (T) – ADR (T-10)
Japan Time T -10 T
Year 1950 1960
ADR 8.2% 9.0%
Aging speed 0.8
Analysis
The followings relations between AS and Price Earnings Ratio (PER). I used AS of 2032. For example, Hong Kong’s ADR is 30.3% in 2022. It will be 48.2% in 2032. So AS is 17.9. Hong Kong will be the fastest ageing region over the next decade. One of the reasons for Hong Kong’s low PER of 12.3 is the ageing population.
The coefficient of determination (R²) is 0.2719.
Developing countries like Cambodia have extraordinary PERs. Let’s look at what happened to the 20 countries with the largest market capitalisation.
R² is 0.2719. AS and PER were still uncorrelated. Let’s exclude Japan and Ireland as they are outliers.
R² is 0.5374.
One of the reasons for the low PER in Japan is the ageing population. Its ADR is 51%. The worst one among advanced countries. The Japanese Government have been too busy to take care of senior citizens and could not invest in future. But the tyhoons have gone. Its aging speed peaked out in 2016 and will slow down until 2030.
On the other hand, regions like Hong Kong and South Korea will experience the high speed like Japan in 2016. Their PERs may stay as low as Japan.
