Monday’s news of Japan falling back into recession continued spurring headlines Tuesday, albeit of a different flavor. They stopped expressing shock at Abenomics’ inability to spur growth and started fearing the world is turning Japanese too—and about to take stocks down with it. However, we humbly suggest the issues hamstringing Japan are the same ones that led to its lost decade. That didn’t go global, and we see little reason to think this time will be different.[i]
Japan’s struggles stem from its … ummm … unique take on capitalism, which is rather more mercantilist than Smithian.[ii] The result: deep structural issues like waning productivity, narrow labor markets, protectionist trade policy and an uncompetitive corporate sector dominated by large, horizontally integrated keiretsu—to name just a few (we could go on). These are supposedly in Japanese Prime Minister Shinzo Abe’s crosshairs, the target of long-promised but undelivered structural reforms.
But most pundits don’t acknowledge how much these structural issues muffle Japanese growth, arguing the lost decade[iii] was a product of deflation and demographics. They don’t acknowledge deflation is a signal—not a cause—of deeper problems. To the extent demographic issues are problematic, they are no match for a free, open economy. From this misdiagnosis, the experts hunt for the next economy ripe for its own “lost decade.” Today’s popular target: the eurozone.
US Treasury Secretary Jack Lew recently warned of a European “lost decade,” and others see myriad similarities between the Continent and Japan, debating whether or not the ECB should copy the BoJ’s monetary policy to spur economic growth. Yet this reasoning is severely flawed—the eurozone doesn’t share most of Japan’s problems. For a major one, the eurozone’s purpose is to facilitate foreign trade—unlike relatively closed Japan, the common currency area is quite active in negotiating free-trade agreements, like pushing talks with Mercosur (Latin and South American) nations since 2010. They actively trade across one another’s borders and with the larger European Union.
Euroland arguably most resembles Japan in labor market rigidity (through different policies, of course)—but even here the eurozone has made progress. For example, Italian Prime Minister Matteo Renzi’s ongoing push to relax Italy’s rigid labor code. Spain has benefited from 2012 labor reform that helped businesses downsize in tough times. Outside labor markets, the eurozone has been pursuing pro-growth, pro-market policies. Spain is cutting taxes. Ireland —long among the world’s most competitive countries—bounced back from its downturn with relatively fast growth. Even France’s nominally Socialist president announced the country wouldn’t introduce any new taxes and appointed a cabinet with a pro-business bent. These incremental moves aren’t immediate economic boosts and we aren’t suggesting the eurozone is an economic juggernaut. Just that such moves contrast positively with Japan, which is largely attempting to paper over competitiveness issues with quantitative easing and fiscal stimulus, a wrongheaded move in the first place. Heck, even less contentious reforms are hung up. It’s comparing apples to oranges to suggest the eurozone should mind Japan’s struggles lest they become their own.
These Japan fears could just be playing into the dominant zeitgeist—that global growth is flagging, requiring someone to “do something.” UK Prime Minister David Cameron reinforced this perception immediately following the recent G-20 summit.[iv] To address the global economy’s flashing “red warning lights,” the G-20 launched a $2 trillion “stimulus” package of reforms and measures, some of which—like the US debt ceiling increase—were taken nearly a year ago. The balance is largely nebulous, “wish list” reports whose implementation comes with a “high degree of uncertainty.” But as a manifestation of the notion the global economy needs saving, (which lacks much fundamental support), it’s a sign of sentiment. Just as the eurozone isn’t Japan, neither is the world.
Since 1994, Japan has suffered through six recessions.[v] Meanwhile, the US has endured two.[vi] Germany three.[vii] France one.[viii] Australia none.[ix] Perhaps Germany and France add another when dating is official, but they won’t add three to five more. Japan hasn’t derailed the current expansion, even though the country has flipped into contraction in 2011, 2012 and the present.[x] Japan presently sits below its peak output from 1997, unlike the eurozone, which is just about 2% off its 2008 precrisis peak. The causes of Japan’s longstanding, repeat weakness—the aforementioned structural headwinds—aren’t blowing against the world at large.
So while headlines suggest Japan may define the expansion’s future, in our view, investors shouldn’t be overly concerned about Japan’s struggles. We don’t see global growth—or this bull market—turning Japanese.[xi]
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[ii] Adam, that is. For those of you who haven’t read The Wealth of Nations.
[iii] Japan’s “lost decade” is actually a “lost 17 years.” Fun fact! Except for Japan.
[iv] We basically see Cameron’s article as the official launch to his re-election bid before 2015’s polls. But hey, we’re skeptical politicians motives ever really stretch very far from self-interest.
[v] Source: Economic and Social Research Institute, Cabinet Office, Government of Japan.
[vi] Source: National Bureau of Economic Research
[ix] Source: Australian Bureau of Statistics.
[x] Source: Economic and Social Research Institute, Cabinet Office, Government of Japan.