“I believe that for the euro area there is some risk of Japanification, but it is by no means a foregone conclusion”, Mario Draghi said, via conference call at the American Economic Association’s annual meeting in San Diego on Sunday.
He was participating in a panel called “Japanification, Secular Stagnation, and Fiscal and Monetary Policy Challenges” along with Janet Yellen and Larry Summers.
The former ECB chief said Europe needs to act quickly and decisively to avert a deflationary spiral. “The euro area still has space to do this, but time is not infinite”, he warned, before chiding governments across the bloc for effectively undercutting monetary policy by refusing to engage in fiscal stimulus, even in locales where there’s ample budgetary breathing room.
“This is why the ECB has been consistently calling for fiscal policy to play a stronger role and capitalize” on low rates, Draghi said, reiterating one the main messages from his last several press conferences as ECB president and presaging what’s expected to be one of, if not the, primary talking points for Christine Lagarde going forward.
For her part, Yellen cautioned against becoming complacent in an environment characterized by secular stagnation. Factors depressing rates “are apt to prove chronic by nature”, she said, adding that while monetary policy “has a meaningful role to play, it’s unlikely to be sufficient in the years ahead [and] should not be the only game in town”.
A year ago next month, BofA’s Barnaby Martin “celebrated” the day two decades previous (February 12th ‘99) that the BoJ first cut interest rates to zero. “With the exception of a few years in between, Japanese interest rates have barely moved since”, Martin wrote.
And while history may not repeat itself, it does often “rhyme”. To illustrate, Martin used the following chart which “shows that the progression of Japanese and ECB interest rates has been eerily similar when overlapping the two time series to match the point of zero interest rates (ECB deposit rates fell to zero in July ’12)”.
The ECB of course cut rates again in September and restarted net asset purchases after what was widely described as the most contentious meeting of Draghi’s tenure.
There are some key differences, which Goldman expounded on in a lengthy piece last year dedicated to the comparison between Europe and Japan.
“After the debt bubble burst in Japan in the early 1990s, nominal GDP growth quickly fell to zero in Japan [but] that’s not true for Europe, where average nominal growth since 2008 – even including 2008/09 – has been 2.0%”, the bank wrote, adding that while Japan “had bouts of clear deflation, not just disinflation, Europe has not seen deflation in the same way, just low and sticky inflation”.
The upshot is that “a deflationary mindset has not become entrenched in Europe”, Goldman wrote.
Or at least not yet, but something needs to happen soon to dispense with the “Japanification” chatter, because inflation expectations are notoriously self-fulfilling. In other words, this is one case where a nation (or a bloc of nations) can actually talk (or maybe “think” is better) itself into an economic quagmire.
As for the US, Alan Greenspan said in September it’s “just a matter of time” before negative rates come calling stateside.
Less than three weeks previous, Summers delivered a somewhat dire warning. “Black hole monetary economics – interest rates stuck at zero with no real prospect of escape – is now the confident market expectation in Europe and Japan, with essentially zero or negative yields over a generation”, he lamented. “The United States is only one recession away from joining them”.
Considering another recession is inevitable, Japanification is coming for us all, apparently.