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Wednesday, April 22, 2009

Japan's Export Decline Slows (Slightly) In March

The rate of decline in Japan’s export slowed in March, after four-months of record breaking contractions. Evidentally this constitutes some sort of sign that the intensity of the recession may have started to ease.





Overseas shipments were down 45.6 percent from a year earlier, as compared with February’s unprecedented 49.4 percent plunge. Most notable was the fact that (on an annual basis) shipments to China were only down 31.5 percent following a 39.7 percent drop in February. Exports to the U.S. also fell less rapidly, but the contraction rate was still very high (51.4 percent following a massive 58.4percent fall in February. Exports to the EU were also down heavily (56.1 percent) while those to Russia were down a shocking 83.3%. One should not read too much into the US figure, since demand in the US started weakening much earlier in the US than it did in China, hence these large numbers are even larger when you think of the original starting point. Insofar as there is any rebound in the Japan numbers it is largely "China related" in some way, shape, or form.



On a seasonally adjusted basis, exports rose 2.2 percent month on month from February, the first such increase since May 2008.

As many are saying, it would be premature to celebrate at this point, since evidently the Japanese economy is in its most severe recession since WWII, but we could say that while the economy is spiraling down, at least it’s no longer spiraling down at an accelerating rate.

Trade Deficit In Fiscal 2008/09

Japan suffered its first trade deficit in nearly 30 years in the year to March, highlighting one more time the continuing vulnerability of the Japanese economy to external demand movements. Japan posted a trade deficit of Y725.3bn in fiscal 2008, its first full-year negative trade balance since 1980.



The trade deficit last year reflects the sharp rise in commodity prices earlier in the year and the severe contraction in exports, which has now lasted six months. Imports fell less than exports last month, and were down only 36.7%, and as a result Japan once more had a trade surplus (of Y11bn, 99 per cent down from a year earlier).


Tuesday, April 21, 2009

Data supporting the concept of continued deflation in Japan

Bloomberg's Jason Clenfield has a piece out today describing how Japan's business have been coping with economic weakness by cutting wages rather than through layoffs. This is not really a surprise given that "lifetime employment" is a concept that still has some support in the country. However, the piece refers to OECD data showing "Japanese salaries have fallen in seven of the last 10 years". This is the definition of a deflationary environment, and would help explain how export businesses maintained profitability levels in spite of stagnant exchange rates and intense competition in the US market. It also helps explain why domestic consumption has been weak as falling wages inevitably reduce consumer spending.

The Bloomberg piece also explains that
"Full-time workers typically get about a quarter of their yearly wages in two lump payments, the amount of which is set at the start of each business year. The so-called bonuses give companies room to adjust labor costs when profits fall. Summer payments will plummet an average of 7.3 percent this year, according to an estimate last week by Tokyo’s Dai-Ichi Life Research Institute. The drop would be the biggest since comparable data became available in 1991".

It will be difficult for the country to see positive GDP growth given both declining wages and declining exports. Japanese consumers will be spending their funds carefully to ensure that they can make ends meet when they expect further pay cuts.

Monday, April 20, 2009

A Perspective on Carry Trading

By Claus Vistesen: Copenhagen


ARE carry trades back in Vogue? With all the talk about second derivatives, equity rallies, and for my own part spring sensation in the market place this question is, I think, a natural one to ask. And by all means, I am not the only one who is asking it. Actually, I think most serious FX punters out there are considering (or have considered) whether it is time once again to seriously consider moving into carry trades.

Now; it is probably a pretty good bet that if Alpha.Sources start talking about the return of any kind of market trend you are probably bound to have missed the boat on it from an investment point of view. Not that I am lacking the discourse or anything, but it is hard to escape the feeling that if we have, since mid February and up to this point, sustained the longest equity rally and subsequent low point in volatility since the crisis broke out, we seem very close to a turning point. Danish fund manager Steen Jakobsen ended last week on an ominous note talking about the biggest selling point this year, which naturally suggests that whatever juice present in carry trades have been squeezed out by now. Add to this that the two most popular pieces currently on Seeking Alpha both extol the end of the current rally, and it definitely seems that the end is nigh for the bulls. Finally, there is the more technical and wonkish perspective in which John Kicklighter, Currency Strategist at DailyFx points out that risk appetite might be close to its peak.

There have been someone however pointing to the possibility of taking advantage of the benign market conditions to dip its toe in the market for carry trades. Darrel Whitten points to the JPY as the classic funding currency and suggests to invest in high yielders such as the Real, the Lira and the Rand. Also Andy Abraham voices the potential for carry trades as volatility has gone down.

At this point it would probably be a good idea to point out that there are carry trades and then are ... carry trades. Ok, an explanation is needed I think. As most of you probably know, the carry exploits the non-existence of the uncovered interest rate parity which states that an interest differential between two currencies should be offset by the higher yielder depreciating vs. the low yielder. In fact, the carry trade in so far as it is pervasive will persistently disprove the UIP and exacerbate the deviation from the theoretical equilibrium. This is something which some authors have coined as self-reinforcing arbitrage Brière and Drut (2009), Plantin and Shin (2008), and Orléan (1999). This also means that while you can always build your very own carry trade basket or engage in carry trade through money market instruments, there is bound to be a substantial agree of piggy-backing in the spot market. Basically, you only need to realize that low yielders can be modelled as a positive function of volatility Cairns et al. (2007) and negative function of equity returns or as I have shown, that equities can be modelled as negative beta assets to low yielders (see also, Kohler (2007)).

Essentially, it amounts to the same money being made on the same strategy, but the underlying investment narrative is very different. In the case of a pure carry trade, it is a strategic position whereas in the case of spot market piggy-backing, the investment narrative is bound to be more opportunistic and self-perpetuating in both directions. This also underpins the inevitable sharp reversals in this game which is something Brière and Drut (2009) touch on when they show how carry trades tend to perform poorly in the context of crises whereas fundamental strategies (based on PPP) will outperform carry trades. I tend to agree, but I would simply add that for the intra-day trader the correlations and functional relationship are stronger in an environment with sharp volatility reversals (such as the current one). Of course and following once again Brière and Drut (2009), they also cite sources to suggest that in times of rigorous pursuit of carry trades and thus deviation of the UIP, the FX market tends to exhibit disequilibria along the lines of other "fundamentals". This suggests that reversals will be all the more substantial when they arise, but they will also be just that, reversals, and thus not deviations from what we might coin as carry trade fundamentals.

What About the Current Rally Then?

More specifically, what are those carry trade fundamentals? Despite the fact that whatever points we can derive from the current rally do not represent a solid scientific foundation, the ideas expressed above easily give rise to the following expression for the return of a low yielding funding currency.

Rfx = F(vol, (-) Re)

Where Rfx is the return on a low yielding carry trade funder (e.g. USD/JPY quoted directly), vol is a measure of volatility (e.g. the Vix) and Re is the expected return on equities. It is important to note that this functional form only has merit in the context of crises and thus when volatility is relative high on a mean basis. This is to say that when the market experiences volatility above a given period average, the carry trade fundamentals strengthen. In terms of which equity index, it is worthwhile to think about the point I also mention in my paper derived from Zimmerman et al. (2003) that when volatility is high markets tend to be correlated to a higher degree than otherwise which in turn tends to diminish the benefits from diversification in exactly the period where investors need it the most. Moreover, Zimmerman et al. also show that down volatility is larger than up volatility which would further solidfy the relationship noted above.

With this in mind let us get some charts on the table and bearing in mind that we can't really draw any conclusions from we still get a strong indicative result.

Even the untrained eye should be able to spot the proposed connection here (click for better viewing). If we look at the evolution in the market since end February (chosen because this is roughly where the Vix peaked), volatility has declined, the traditional carry crosses (mainly JPY here) have moved to favor the low yielder, and equities have bounced.

Of course, the devil is also very much in the detail here. Especially, the USD is interesting here since it shows us that this is never going to be a one way street. Currencies are thus relative prices and while the USD/JPY still seem, despite the almost equally low yields, to exhibit carry trade fundamentals the USD is also itself beginning to act like a funding currency not least against the Euro as well as against the Rand (and I would presume other EM higher yielders too). Clearly, there could be another explanation here, namely that of safe haven flows in times of a spike in volatility. Yet, I still think we need to consider the effect from the US' credible commitment to inflate its way out of this issue and how Bernanke might be paving the way for, as some has mused, the mother of all carry trades. A colleague of mine pointed the following out recently during a discussion;

So the big issue is really whether all this excess liquidity will work its way out of the US - and into India, Brazil etc etc - as we move forward, especially since, if getting a recovery turns out to be as hard as everyone seems to think it is then the Fed (et al) are likely to be holding interest rates near to zero for quite some time, and all the saving people will be trying to do (with few genuine investment outlets) will mean that the last "savings glut" may turn out to look like very small beer, and "abundant liquidity" will be the name of the game.

(...)

Could we steadily see the introduction of a "cheap dollar policy", you know, to keep all those exports flowing out, and keep the cost of servicing the US debt down for a while.

Now, apart from the rather ominous prospect of the US running a current account surplus which would mean a quite severe drainage of aggregate global demand, we need to ponder the effects of a regime of convergence towards QE among the developed economies and what this will mean for the carry trade. Stefan Karlsson had a reasonable go at explaining the link between weaker equities and low yielders a while back, but now the question begs as to what will happen once many of the major G7 economists go for QE. Perhaps it will be like Darrel Whitten noted that the flow of funds will simply move towards the EM to an even higher degree. But I would hold this to be true already in the sense that there will always be those who pursue the juicer trades out there which are bound to be demonstrably more risky than others. It will be interesting in this sense to see whether old relationships will hold regardless of the G7's central banks inclination to go for very low interest rates.

The graphs above cover too short a period to merit any conclusion, but investors should be aware of the proposed relationship, when it reverses and then ultimately to quantify it. In essence the key here is to pin down the extent to which currency movements persistently move contrary to fundamental theories.

Don't get Steamrolled

One of the best conceptualizations of the carry trade is still the Economist's Buttonwood and his narration the instant gratification of carry trades and subsequently how investors were picking up dimes in front of an approaching steamroller. In terms of the immediate prospect of benefiting from carry trade, it is thus important to note that while a crisis such as the one we are experiencing at the moment certainly will tend to intensify many of the links through which carry trades manifest themselves, the reversals will also be more abrupt and unpredictable. Also we should never forget Macro Man and his pink flamingos. I am sure that despite my best efforts to pin down a theoretical and empirical relationship here, pink flamingos will be ever present.

On a more wonkish note, I am doing a thorough re-write of my paper on carry trade (see link below) which is based, in part, on the discussion above. I realize that although the empirical results of the original paper are fairly sound, the theoretical framework is quite poor. I, of course, won't stand for that so will try to tidy this part up significantly as well as I am expanding the empirical investigation especially since the regressions in the full sample suffer from some, erm, statistical issues [1]. Stay Tuned.

List of References (+ some extra inspiration)

As you can see from reading Brière and Drut (2009), I have ripped parts of their list of references.

Bank of International Settlements (2006) - The recent behaviour of financial market volatility, BIS Paper No. 29

Brière and Drut (2009) - The Revenge of Purchasing Power Parity on Carry Trades During Crises, CEB Working Paper No. 09/013 Feb. 2009

Cairns J., Ho C. and McCauley R. (2007) - "Exchange Rates and Global Volatility: Implications for Asia-Pacific Currencies", BIS Quarterly Review, March.

Corcoran, Aidan (2009) - The Determinants of Carry Trade Risk Premia, IIS discussion paper no. 287

Kohler D. (2007) - Carry Trades: Betting Against Safe Haven, University of St.Gallen Discussion Paper no. 2007-12.

Olmo, Jose and Pilbeam, Keith (2008) - The Profitability of Carry Trades, Annals of Finance 5: 231-241

Orléan A. (1999) - Le pouvoir de la finance, Odile Jacob Editions.

Plantin G. and Shin. H.S. (2008) - Carry Trades and Speculative Dynamics, available at
SSRN: http://ssrn.com/abstract=898412.

Vistesen, Claus (2009) - Of Low Yielders and Carry Trading – the JPY and CHF as Market Risk Sentiment Gauges, Working Paper 06-2008

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[1] Basically, the regressions suffer from heteroscedasticity in the full sample. This need not be a severe problem for the overall result since the f-stats and standard errors are large and correspondingly small. Also, I am not really interested in the full sample, but in parameter stability across two distinct periods. Pre crisis and post crisis. The problem arises here since the tests we have to check for parameter stability (Chow tests, dummy approach as well as the simple one) are of course sensitive to unequal variances in the chosen period intervals.

Monday, April 13, 2009

US Treasury holdings: Japan vs China

This is based on data from the Treasury Department on Major Foreign Holders of U.S. Treasury Securities. The chart below(click to enlarge) through January 2009 shows that China passed Japan in official holdings in September 2008. Now we know from Brad Setser's analyses that there is more than just official Treasury holdings to consider when comparing total foreign investment of different countries. But I find it interesting that China didn't surpass Japan until very recently in terms of official UST holdings. Japan's decisions regarding its holdings will be as significant as China's in terms of the effect on the USA's fiscal policies.


Saturday, April 11, 2009

A shortage of leadership and ideas

Yesterday Japanese Prime Minister Aso released his administration's economic support plan, amounting to 15.4 trillion yen or about $150 billion. Bloomberg reports that PM Aso's stimulus plan is receiving largely negative reviews from economists. This plan would result in Japan's total debt reaching 800 trillion yen by next March. The Bloomberg piece states that
"Aso, 68, said the government will consider raising the consumption tax from the current 5 percent once the economy recovers “in order to not leave a huge debt to our children.”
The amount of $150 billion is not that large relative to the size of Japan's economy or even the measures that other governments are taking. Further, "once the economy recovers" is a hypothetical, and raising consumption taxes whenever would likely push the country back into recession. The government has been avoiding raising consumption taxes for precisely that reason.

As part of the same economic support plan, the Guardian tells us that Aso said "Japanese content, such as anime and video games, and fashion draw attention from consumers around the world", and "Unfortunately, this soft power is not being linked to business overseas. By linking the popularity of Japan's soft power to business, I want to create a 20-30 trillion-yen market by 2020 and create 500,000 new jobs." What's delusional about this idea is that it appears that the Japanese government thinks it can generate the spread of Japanese culture by government programs. Quality in relation to cars and quality in relation to art/ideas are two different things.

If Japanese leadership has realized it can't count on US consumption to generate an economic recovery, that is a good thing. But it sounds like more of the same when they talk about exporting culture and taxing consumption.

Tuesday, April 07, 2009

How to Increase Consumption in Japan?

By Claus Vistesen: Copenhagen

Even though the big news of last week undoubtedly is represented by the one trillion session in London, the smaller than expected nudge from the gents at Kaiserstrasse and the emerging talk of a market bottom and impending recovery, I am going to wonkishly stay on the topic with respect to my latest long piece on the land of the rising sun and its economic woes. One issue which I dealt with was the skewed nature of Japan's growth path dependent on exports as well as the derivative issue of how to raise consumption in Japan or put more broadly; how to spur domestic demand in a sustainable way? My answer to this question is more or less implicit in the analysis linked above, but before we get to that let me present two alternative suggestions or, as it were, arguments. One in the form of a piece by the Economist fresh off of the newest print edition and one more wonkish and academic by economist and investment adviser Cesar Molinas.

As for the Economist, they are not quite convinced that the story of Japan is also a story about export dependency and thus that this has something to do with demographics. That does not surprise me since the Economist's has, on several, occasions attempted to debunk this argument. Here I won't take directly issue with this claim but rather indirectly by scrutinising the following argument by the Economist;

The OECD predicts that public-sector debt will approach 200% of GDP in 2010, so the scope for further fiscal stimulus will be limited. Nor can Japan rely on exports for future growth; to the extent that it had enjoyed an export bubble, foreign demand will not return to its previous level. Japan needs to spur domestic spending.

One possible option, which the government is exploring, is to unlock the vast financial assets of the elderly. Japanese households’ stash of savings is equivalent to more than five times their disposable income, the highest of any G7 economy, and three-fifths of it is held by people over 60 years old. Gifts to children are taxed like ordinary income, but if this tax were reduced, increased transfers could boost consumption and housing investment since the young have a much higher propensity to consume. In theory, this could give a much bigger boost to the economy than any likely fiscal stimulus.

Of course, one reason why the elderly are cautious about running down their assets is concern about the mismanaged pension system and future nursing care. Services for the elderly should be among Japan’s fastest growing industries and create lots of new jobs, but they are held back by regulations which restrict competition and supply. Deregulation of services would not only help to improve the living standards of an ageing population, but by helping to unlock savings might also drag the economy out of deep recession.

The key to notice here is that the Economist talks about unlocking the savings of Japan and thus about making those large coffers of assets, primarily held by the mature parts of the population, work. What is Particularly interesting here is the idea to move money from the wealthy old generations to the young and further to implement tax incentives to optimize the effect from this. This sounds intuitively right and seems a sound policy proposal. But there is a big difference between transfers in kind (bequests) and investments (see Molinas' article).The Economist seems to be talking about cutting taxes for transfers in kind which would increase consumption in the sense that that the propensity to consume is higher amongst younger generations. In principal I am not in disagreement here although one has to wonder whether in fact those ever smaller younger generations really do have such a high propensity to consume. Basic ricardian equivalence and life cycle theory suggest that these transfers would be saved just as much by the young as by the old in the sense that as the young cohorts grow ever smaller relative to the burden they have to support through the tax system they also need to start saving earlier (and more) for their own retirement However, the most important point is that the Economist's suggestion effectively amounts to rapid dissaving and, in fact, even more rapid dissaving than if the elderly cohorts were to spend their wealth themselves. Note that this would effectively be dissaving and thus effectively not a good thing for Japan in the sense that it is not easy to see how Japan would replenish these savings. Moreover, as I have argued time and time again societies do not dissave they same way as their microagents do since this would effectively amount to a society/economy having an end point. Rather, they need to make those savings work.

Enter the article by Molinas.

Now, I could say a lot of interesting things about Molinas' piece and especially about how to operationalize demographics (and deflation) through the use of that illusive subjective discount rate. Essentially, this would allow us to approach the issue through the use of representative agent models and even though this may create a host of issues on its own and essentially be inappropriate, it means that we can start with a model well grounded in traditional neo-classical methodology. This may not be a virtue in itself, and for some not at all, but it is a place to start and an important one in the context of economic modelling.

Anyway, and moving on to the issue at hand there is an important twist in the way Molinas approaches the issue of lack of domestic demand (and thus deflation). Let us look at the following;

Taxation may be the best instrument for fighting deflation in the long run. At the core of deflation lies the problem of elder generations keeping their wealth away from entrepreneurial undertaking. A severe inheritance tax combined with a generous gift tax may reshape the battlefield of the war against deflation in a very favourable way, moving the focus inside households. Aging societies should try hard to mobilise their wealth. The best way of doing so may be establishing strong tax incentives for elders to transfer wealth to the younger generations while they are still alive.

It is important to note the distinction, albeit timid, with the Economist here.

Molinas' suggestion is consequently different in one key aspect. What Molinas suggests is that the eldery be more inclined to invest in the younger generations and that this this is pushed through e.g taxation on stashed savings. Basically, Molinas talks about mobilising the wealth and that this is invested in the (assumed) portfolio of profitable projects held by the younger cohorts. Like the Economist, Molinas talks about using taxation (or the lack thereof) as a weapon and actually my guess is that when Molinas talks about a more generous gift tax he is talking about the same thing as the Economist is.

Now,I am of course molding the arguments of the Economist and Molinas to fit my own agenda here but I still think that a clear message can be taken from these two pieces. Whether it be through transfers in kind or through investment Japan should attempt to channel the vast sum of wealth towards its younger generations in order to make the money work in stead of just sitting in deposits and under the mattress.

At this point, I am intrigued, very intrigued. Consequently and while these two contributions sound plausible they miss some crucial points. As for the Economist, I have already highlighted the fact that Japan is going to fight dissaving simply because they have to. This may sound rather unjust to simply wave off the argument like this. But we should also think about the fact that for Japan as an economy these savings are best mobilised if they are invested to earn a corresponding return [1]. In short, we will see dissaving but it won't solve any of Japan's problems to transfer older cohorts' wealth to younger generations for them to spend.

Moving on to Molinas he goes for the capitalist solution as it were; go forth and invest in the Japanese entrepreneur! This is a very appealing proposal, but tell me something; where are these entrepreneurs again, how many are they and what is the capacity for the young generation to absorb all those savings with the aim of delivering a return that can help Japan generate the income it needs to increase domestic demand and subsequently rid itself of the dreaded deflation.

I am almost done now and in order to move forward on this it is important to realize one major point about the arguments presented above. They are both made in the context of a closed economy. Whether it is in the form of transfers in kind or investment flows both the Economist and Molinas argue within the boundaries of Japan moving money from the elder to the younger cohorts. In doing so however they miss, or neglect, the fact that ageing as a demographic process manifests itself through changes in the age structure of society and thus that the kind of transfer they are talking about are not viable simply because the mismatch between generations is too great (and will grow larger as we move forward). Moreover, and even though it would in principle be possible for Japan to do as proposed above, it would not be rational let along fruitful from the point of view of fighting the slump in domestic demand.

So where do we go from here?

The crucial link to incorporate here is to allow Japan the possibility to trade with the rest of the world. Then I don't think it is implausible to imagine that Japan indeed will fight dissaving through investing its stock of savings, but that this has to be through a leakage. Quite simply, Japan can increase consumption by investing its wealth abroad for a higher return than at home as well as by maintaining a structural excess investment surplus towards the rest of world by letting domestic capex and production decisions respond to foreign in stead of domestic demand (at least on the margin). This finally means that the way Japan as an economy can fight off dissaving and attempt to battle deflation is to rely on the ability to keep a structural surplus towards the rest of the world.

Once we have established this point we can start to look at the real issue at hand here. What happens when everybody gets as old as Japan is now? Think global imbalances and the discussion we are having right at this moment about how to find a batch of economies with the ability to run a sustainable deficit to counter others' need to run a surplus. Basically, there are externalities at work here and essentially market failures. These are produced, in part, by ageing and since we know for sure that one country after the other will venture down Japan's road in terms of demographic structure we would be wise to give these points more than a scant thought as we move forward.

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[1] Here we could of course also open the can of worms in the form of Japan's public debt and how, at least part, of those well earned savings need to be put aside in order to finance the deficit spending by the government which again is only set to worsen as Japan gets older (and on and on we go).

Monday, April 06, 2009

An analysis of Japan's financial system that is likely still valid

The tax structure, however, remains untouched by reform. So do accounting practices designed primarily for Ministry of Finance controls and not for public disclosure. In fact, most firms don't even regularly issue detailed reports to the public. The MOF gets the details and releases its own reports weeks later. Firms issue summarized versions to shareholders and prospective investors...

But these are small matters compared to the impact on the financial industry of [yen]230 trillion ($1.8 trillion) held in postal savings accounts run by the government and untouched by any deregulation. One-third of Japan's total savings is thus under government control. These funds, together with an additional [yen]100 trillion ($800 billion) from postal insurance contracts, are managed by the Ministry of Finance. Special tax treatment--it's the government post office, so there are no taxes paid on those revenues--give postal savings accounts higher interest rates and a clear advantage compared to banks.

Then there is the finance ministry itself. MOF officials establish financial policy, license financial institutions, and supervise their performance. Until recently, the ministry ran the Bank of Japan too (and many believe it still will, though more indirectly, under a revised law). As the financial reporting practices illustrate, institutional management systems are designed with MOF control in mind. Revealing serious problems with banks, brokerages, or insurance firms is, in practice, the same as revealing bad news about the MOF itself. No wonder that, as the end of the decade approaches, there is still little accounting of the bad loans stemming from the crash of the bubble economy in 1991."

This is a much more logical explanation of Japanese saving behavior than frequently referenced "cultural" differences.

Wednesday, April 01, 2009

A novel approach to unemployment problems

The Associated Press are reporting that Japan gives cash to jobless foreigners to go home. The lead states that
"Japan began offering money Wednesday for unemployed foreigners of Japanese ancestry to go home, mostly to Brazil and Peru, to stave off what officials said posed a serious unemployment problem.

Thousands of foreigners of Japanese ancestry, who had been hired on temporary or referral contracts, have lost their jobs recently, mostly at manufacturers such as Toyota Motor Corp. and its affiliates, which are struggling to cope with a global downturn.

The number of foreigners seeking government help to find jobs has climbed in recent months to 11 times the previous year at more than 9,000 people, according to the Ministry of Health, Labor and Welfare.

"The program is to respond to a growing social problem," said ministry official Hiroshi Yamashita.

Japan has tight immigration laws, and generally allows only skilled foreign workers to enter the country. The new program applies only to Brazilians and Peruvians of Japanese ancestry who have gotten special visas to do assembly line and other manufacturing labor. It does not apply to other foreigners in Japan, Yamashita said."

Paying people to leave the country creates the perception of severe dysfunction in the government's approach to the country's problem. Limiting the payments to foreigners of Japanese ancestry highlights the country's cultural attitude towards people of non-Japanese ethnicity. Japan will need to replace millions of workers aging out of employability in the near future, and domestic fertility is not going to be the answer anytime soon. This kind of bias in treatment of foreign guest workers will make attracting a labor force from other countries difficult.