As the eurozone has low inflation, a very expansionary fiscal policy and a sharp rise in public debt, a monetary policy of monetising fiscal deficits, zero interest rates and the prospect of an ageing population, there is increasing talk of a “Japanisation” of the zone. However, there are very significant differences between Japan and the eurozone, as economists at Natixis note.
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Key quotes
“It is understandable that there is talk about the ‘Japanisation’ of the eurozone since currently inflation in the eurozone is very low; the ECB is monetising fiscal deficits; public debt is high; long-term interest rates are zero and population ageing is going to be significant.”
“The fact that interest rates are persistently very low has not led to capital outflows in Japan that have been large enough to cause a lasting depreciation of the yen. This is due to the strong ‘financial patriotism’ of the Japanese, who keep a large part of their wealth in yen even though the yield on yen assets is very low. In the eurozone, on the contrary, there have been large capital outflows since 2012-2013 as a result of the search for higher yields, particularly in the US, which explains, in particular, Europeans’ massive accumulation of Treasuries and the depreciation of the euro against the dollar from 2013 onwards. It is therefore likely that the tolerance for zero interest rates is lower in the eurozone than in Japan, making it more difficult to maintain a very expansionary monetary policy on a permanent basis in the eurozone than in Japan.”
“Income distribution is extremely skewed against wage earners in Japan, but not in the eurozone, creating a much stronger deflationary trend in Japan than in the eurozone. This deflationary trend takes the form, in particular, of massive excess corporate savings in Japan and lower medium-term inflation in Japan.”
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