Confronted with slowing economic growth, uncertain politics and wobbly markets the European Central Bank reliably came to the rescue last week with new stimulus measures and a deferral of the start to any normalisation of interest rates. Yet, despite the soothing medicine, equity markets were initially unsettled.

This was partly because of the sharpness of the ECB’s downgrade to this year’s growth forecast from 1.7 per cent to 1.1 per cent. But it was also a response to the downbeat rhetoric of ECB president Mario Draghi, who described the eurozone as being in “a period of continued weakness and pervasive uncertainty”. That lends topicality to a recent report by economists at ING who point out that a low-growth, low-inflation environment in the eurozone, along with a negative deposit rate and ample central bank liquidity, bears a striking resemblance to post-bubble Japan. Is the zone, they ask, heading for “Japanification”?

To answer this question they created a model based on research by Takatoshi Ito of Columbia University, which aims to depict the main symptoms of the Japanese “disease”. The model takes into account such factors as the output gap, inflation, policy interest rates and demographic change. Matching the behaviour of the two economies leads to the conclusion that over the past two years the eurozone economy has left its “normal” growth path following the global financial crisis and has dipped into the Japanification territory that has characterised that country for the past quarter century.

The continental Europeans have not, admittedly, been afflicted with Japanese-style deflation and while Japan’s gross public sector debt stands at close to 240 per cent of gross domestic product, eurozone public debt is down to 86 per cent from almost 92 per cent five years ago. Yet the demographic comparison is interesting. Japan is the world’s oldest country. Its population shrank by 1m between 2012 and 2017, an amount equivalent to the population of Stockholm, and is forecast to shrink by 25 per cent in the next 40 years. The eurozone is now moving in the same direction, with a working age population that started to shrink in 2009. Shrinkage is expected to continue notwithstanding continuing immigration.

The difficulty with the comparison, it seems to me, is that the eurozone is not a homogeneous bloc. Southern Europe, especially Italy and Greece, is very different from the north and has arguably performed far worse than Japan. In addition, perceptions of Japanese stagnation have been distorted by demography.

Note, too, that the Japanese suffered a far greater loss of wealth than anything seen in Europe after the great financial crisis. Richard Koo, of the Nomura Research Institute, has calculated that the cumulative loss of wealth on shares and real estate between 1990 and 2015 was equivalent to three times the loss of wealth in relation to gross domestic product that the US incurred in the 1930s slump. Yet in per capita terms, Japanese GDP growth since the bursting of its bubble in 1990 compares quite respectably with the US over the period.

Compare and contrast with Italy, where public sector debt looks uncomfortably high at about 130 per cent of GDP and where in the 20 years to 2017 the Italian economy grew in per capita terms by scarcely more than zero. As for the labour market, at no time since 1990 has Japanese unemployment exceeded 5.5 per cent. There is, of course, hidden unemployment in large Japanese corporations. Even so, there is not the widespread immiseration that afflicts so many unemployed people in southern Europe.

The most striking difference arises from Japan’s unique structural bind, whereby the country has been dependent on huge government deficits to offset the deflationary impetus of excessive private sector savings and so sustain domestic demand. Because of worries about excessive government debt policymakers embark on periodic consumption tax grabs to improve the fiscal position — another is due later this year — which makes the economy’s growth trajectory bumpy. And in the long run this unbalanced flow of funds is fundamentally unstable.

Yet it could equally be argued that the eurozone has its own version of this syndrome. The bloc runs a large current account surplus reflecting northern Europe’s tendency to save more than it invests. It also has a flawed monetary union that delivers an over-competitive exchange rate to Germany and other northern Europeans. Their fiscal conservatism militates against any attempt to address the north-south imbalance that results from these ramshackle monetary arrangements.

The conclusions: the eurozone will continue to be overdependent on the rest of the world for demand stimulus; Japanification will become a more familiar word in the European vocabulary; populism will advance; and the ING authors may be right in arguing that interest rates will remain lower for much longer than most people now expect.

john.plender@ft.com

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