What is Japanification?

Fears are growing that the economic downturn and record deflation triggered by the coronavirus outbreak may trigger the so-called “Japanification” of the eurozone.

The term is used as shorthand for the economic problems that crippled Japan around the turn of the millennium.

What happened in Japan and could Europe go the same way?

Subscribe to The Week

Escape your echo chamber. Get the facts behind the news, plus analysis from multiple perspectives.

SUBSCRIBE & SAVE

Sign up for The Week's Free Newsletters

From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.

From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.

Sign up

Around 20 years ago, Japan was hit by “weak rates of growth and persistently low rates of inflation despite huge amounts of policy support, particularly from central banks”, explains Neil Shearing of London-based research consultancy Capital Economics.

The Telegraph reports that “economists have long feared that the eurozone is heading into a state of Japanification where it cannot escape a period of stagnation, defined by weak growth, ultra-loose monetary policy and deflationary pressures”.

Deflation can cause people to stop spending, in the expectation that prices will fall lower in future, and can also hurt employers if wages do not fall with prices.

This increases the pressure on the economy and “can cause a vicious cycle”, the newspaper says.

How great is the risk facing the eurozone?

Experts say the coronavirus outbreak is resulting in economic damage that poses the greatest risk faced by the eurozone since the 2008 financial crash.

From a “big-picture perspective”, the pandemic “has once again brought the structural issues of debt, demographics and disinflation to the fore”, Morgan Stanley economists warned in mid-March, as the Los Angeles Times reported at the time.

Days later, the European Central Bank (ECB) launched an emergency €750bn (£660bn) package to ease the impact of the coronavirus pandemic. ECB boss Christine Lagarde tweeted that there were “no limits” to the bank’s commitment to the euro.

Europe is not alone in taking extraordinary measures to try to mitigate risk. The US Federal Reserve last month announced that it was cutting interest rates to near zero and buying at least $700bn (£570bn) of Treasury and mortgage-backed securities in a bid to boost the economy.

“We’re essentially at the Japanese place,” former treasury secretary Larry Summers said during an interview with Bloomberg Television. “That’s a place that’s very hard to get out of.”

David Mann, chief economist for Standard Chartered Plc in Singapore, told the network to “think of things like helicopter drops” - central banks printing cash and delivering it straight to the public - “think of things like fiscal deficits that could be partially directly monetised by central banks”. This new toolkit will be needed “not just during this shock, but during the 2020s”, Mann warned.

–––––––––––––––––––––––––––––––For a round-up of the most important stories from around the world - and a concise, refreshing and balanced take on the week’s news agenda - try The Week magazine. Start your trial subscription today–––––––––––––––––––––––––––––––

How is Japan’s economy doing now?

“Not all that bad,” says Capital Economics’ Shearing. Japan’s GDP has risen by an average of 1.3% a year over the last decade, while overall employment has never been higher.

“Predictions of an impending fiscal catastrophe caused by a large and rising government debt burden have (so far) proved to be unfounded,” Shearing adds.

However, the high employment rate in the East Asian nation has led to wage growth stagnating, and putting more people to work without creating more work to go around has seen productivity fall.

And inflation remains stuck at very low levels, despite “super-loose” monetary policies from Bank of Japan.