People who are concerned that the eurozone is repeating Japan’s lost decade of low growth and deflation in the 1990s are wrong — things are actually much worse. Japan’s lost decade should actually be a “target to reach” for Europe, according to a research note on Friday by Ruben Segura-Cayuela at Bank of America Merrill Lynch.
“Concerns regarding the Japanification of the euro area are increasing,” Segura-Cayuela writes. “We argue that we should not fear such a scenario.” That sounds like good news at first, but what Segura-Cayuela actually means is that we should worrying about a much scarier scenario.
As things stand, the eurozone is in a much worse position than Japan, the note explains:
Back in 1995, the unemployment rate in Japan was not too far from 3%. Additionally, Japan has managed to enjoy a decent GDP per capita growth compared with the euro area. The current situation in the euro area is far from the initial conditions observed in Japan back then. The unemployment rate is four times higher and it is hard to see, without ambitious reforms, sustained productivity growth that would avoid a continued deterioration of living standards.
Japanese unemployment did not even reach 6% in the worst periods of the last two decades. There job market was not only much stronger, but the country did not have th weak and fragmented political and economic institutions that the eurozone has today.
“With large levels of unemployment and deteriorating living conditions, political and social instability is likely to arise in the medium term… we think it is certainly unavoidable on the current path,” the note added.
The note adds that there are some similarities between Japan and the eurozone, particularly in terms of an ageing population, which will weaken investment, growth and productivity. But really, Europe would kill for Japan’s lost decades.