Daily Management Review

Analysts: Beware of “Japanese” effect on European economy


03/25/2019


The crisis in Japan is now characterized as a “lost decade”: the economy has barely grown, the country has been experiencing deflation, and a huge amount of bad debts has undermined banks. Then the second and third decades were “lost”. Only in 2016, nominal GDP returned to the level of 1997; national debt reached 238% of GDP in 2018. The central bank made several attempts to stimulate the economy with ultra-soft monetary policy measures and in recent years has been buying not only government bonds, but even stocks. In recent years, similar trends have been observed in the eurozone, ING analysts point out: the national debt in Greece reached 183% of GDP (130% - in Italy). There was deflation in Spain in 2014–2016, and the growth rates of the Italian economy in 2008–2013 were predominantly negative. The ECB keeps rates near zero and provides tremendous liquidity through a cash incentive program.



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pixabay
Similar trends are observed in demographics. Japan is the oldest country in the world, and its population declined by 1 million in 2012–2017. It is projected to decrease by 25% in the next 40 years. In the eurozone, the working-age population began to decline in 2009, and this trend is expected to continue, despite the influx of immigrants.

ING analysts have made a model of "Japanization." It includes the following components: the gap between actual and potential growth of the economy; inflation; securities rate; demographic changes. The resulting index has a neutral value of about 4–6 points: this is a zero gap, target inflation of 2%, rates of 2–4%, zero change in the dependency ratio (ratio of elderly dependents to the working-age population). The lower is the index, the higher is the risk of "Japanese disease".

The index for the euro zone after the 2008 crisis not only fell below the neutral value, but also went into negative territory, largely repeating the Japanese figure 17 years earlier, ING indicates. Similar dynamics is observed for short-term interest rates.

For the time being, the euro zone has been “Japanized” only to a certain extent, the bank’s economists admit. In Japan, inflation has not reached the target of 2% since 1993, and since 1991 there have been 12 deflationary years; prices in the euro zone, though slowly, are rising. National debt fell to 86% of GDP from 91.8% in 2014 due to austerity measures, the budget deficit goal of 3% of GDP is retained, while the Japanese government spends a lot to support the economy: at the beginning of this decade the budget deficit exceeded 7% in recent years - 4% of GDP.

Helmut Kaiser, Managing Director of Deutsche Bank Wealth Management, agrees that there are many similarities between the euro zone and Japan in terms of interest rates and demographics. The Japanese economy is growing at 1–1.5% per year; the yen is strong enough; some companies are extremely profitable, they have high performance, high-tech exports. A similar situation is observed in the eurozone. “The good news is that Japan, although it has to pursue a stimulating monetary and fiscal policy for 25 or even 30 years, is unlikely to experience a recession. Life can go on even with poor demographics and giant public debt,” he adds.

source: marketwatch.com






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