What can western economies learn from Japan’s experiences

09 April 2013

Standard Life Investments, the global investment manager, believes that the USA and Europe are involved in a struggle to avoid many of the problems that Japan’s economy has faced over the last two decades.

Speaking at the Centre for Investor Education Conference in Tokyo, Andrew Milligan, Head of Global Strategy at Standard Life Investments said:

Andrew Milligan

"For many years, global investors have paid little attention to Japan, an economy traditionally associated with slow growth, deflation, and highly controlled capital markets. However with the recent series of policy announcements by the new Japanese government, at a time when many Western economies face slow economic growth, commentators are increasingly looking at the Japanese economy to see the implications of stagnation and deflation and understand the possible measures that could be taken to prevent this outcome.

"Although the negative implications of Japanese style stagnation and deflation are obvious the effectiveness of Western measures to avoid this outcome are still uncertain. While there has been considerable debate about how monetary policy can help support other policies to create economic growth, there is growing agreement that central bankers can only buy time - time to allow the reduction in household debt burdens, economic rebalancing, or restructuring of labour markets and welfare systems.

"We believe that demand-side stimulus, whether monetary or fiscal, must be complementary with other issues such as structural reforms and macro-prudential regulation. Too often in the public debate, politicians and economists stress one but not the other, e.g. growth or austerity.

"Our analysis suggests that the US and the UK seem least likely to go down the Japan path. Although they are both going through a difficult deleveraging cycle, they have central banks that have acted to avoid deflation. This has helped prevent nominal GDP falling too much and hence allowed real debt burdens to decline. Bank reforms were also much faster than in Japan while demographics are more supportive. In addition, both countries are much less regulated economies than Japan's, so the supply side looks to be in better shape.

"Conversely, there is definitely a growing risk that the Eurozone as a whole, and some countries such as Italy in particular, are beginning to see similar problems to Japan. Within Europe, however, there are significant country differences. Germany is not France which is not Italy.

"It is important to recognise the unique state of the European experiment. Co-ordination is difficult. Monetary policy is conducted at the Eurozone level, financial regulation and trade policy is conducted at the European Union level, while fiscal policies are mostly determined at the national level. No decision has yet been reached of which level in practice banking regulation will operate at. As the crisis has abundantly shown, this presents a special set of challenges to overcome, particularly coordination problems."