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Europe’s growth and inflation are slowing, worrying economists and investors that the continent may be the next place to go through “Japanification.” James Mackintosh reports:
Japanification is back. The slowdown in European growth and inflation has Wall Street once again raising the fear that Europe is turning Japanese, something Bank of America Merrill Lynch argues is now the “most consensus trade in the world.”
Japan, of course, has struggled for years with low inflation, and its stock market has never recovered from a crash nearly 30 years ago. Europe has some strong similarities. The European Central Bank and the Bank of Japan have both tried long periods of zero and now negative interest rates, without igniting inflation. Both prematurely raised rates before realizing the extent of their troubles. And both have aging populations weighing on growth prospects.
These similarities matter to investors. But the differences may matter more to governments and the population. The truth is, Japan’s economic growth hasn’t been nearly as bad as everyone believes, while Europe’s policy response has been quite different from Japan’s.
Sure, Japan had slow growth in the decade after its bubble burst in 1990, as its banks ran into trouble. But after that the Japanese economy—measured per person to strip out the lack of population growth—did well. Since 2000 Japanese GDP per capita has grown more than the eurozone’s in purchasing-power-parity terms, according to the World Bank, and since 2006 it is risen faster than the U.S. or U.K., too. Meanwhile, Japan’s unemployment has been consistently the lowest of any developed country.
Europe’s response to its twin crises of 2008 and 2010-12 was easy monetary policy and tight fiscal policy. Japan did precisely the opposite: For more than two decades after its crisis it ran positive real interest rates—that is, a rate higher than inflation—almost all the time. The European Central Bank hasn’t had a rate above core inflation (excluding energy, food, alcohol and tobacco) since it retreated from its mistaken rate rises in 2011.
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