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Turning Japanese

Europe is turning Japanese

Trends in the European economy look a lot like Japan’s lost generation.  This is hardly surprising given that Europe has followed the same monetary policies adopted by Japan when its economy stalled in the 1990s.  Writing for the Evening Standard, Hamish McRae explains:

“That is not a pro-Brexit statement. It is simply an observation from what has been happening in the bond markets. But it should be a profound concern, for if much of Europe were to experience the Japanese condition, with little economic growth and limited opportunities for the next generation to find decent jobs, then this would be very bad news for us too.”

McRae notes that – unlike the US and UK – the EU has followed Japan into negative interest rate territory.  So much so that even German bonds are now offering negative yields.  The result is that investors have all but given up hope.  It is now more lucrative to hide cash under the mattress than it is to invest in European bonds:

“Why not just stick bank notes in a safe, rather than buy securities which will lose value? Good question. That is what some German banks are thinking of doing, and many people in Germany do already.”

The impact is felt outside the financial sector.  With negative interest rates, capital formation becomes a problem.  It becomes much more difficult to launch new enterprises or to expand existing ones.  Savers can no longer make a return.  Pension and insurance funds stall.

McRae is not alone in seeing the risk of a prolonged Japan-like depression in Europe.  However, he avoids the obvious difference.  Japan is a single cohesive nation.  The same cannot be said for a Europe of 28 disparate states.

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