Euro Area Down But Not Out as Japanese Lost Decade Looms

The 18 euro nations are in the seventh year of a lost economic decade with no end in sight.

It still won’t get as bad as in Japan, which continues to struggle to escape a 15-year bout of deflation and recession, say analysts at ING Groep NV (INGA) and brokerage Pavilion Global Markets Ltd.

“We doubt that the euro zone, its currency and its equities will mimic the post-1990 Japanese experience,” Alex Bellefleur, Pavilion’s Montreal-based global macro strategist, said in a June 17 report.

Such a view serves to rebut economists at Morgan Stanley and JPMorgan Chase & Co. who warn the euro area could repeat Japan’s malaise if the European Central Bank and governments don’t provide more monetary and fiscal stimulus.

There are certainly similarities between Japan and Europe: lackluster growth, banks reluctant to lend, ageing populations, currencies made uncompetitive by current-account surpluses and criticism that central bankers have been too timid.

The differences nevertheless outweigh the parallels, according to the reports of Bellefleur and ING economist Martin van Vliet.

The biggest contrast is the scale of the demand shocks, said Bellefleur. That means that even while slow off the mark, the ECB was still faster to respond than the Bank of Japan did in the 1990s.

Europe’s Banks

Europe was also quicker to bolster its banks, in Bellefleur’s view. Japan took a decade to realize the extent of the industry’s non-performing loans and to begin to write them off; Europe’s peripheral countries already have acted. Euro-area lenders have also raised capital from equity markets, an avenue that was mainly shut to Japanese banks.

The balance sheets of European companies are in better shape and its firms are focused more on maximizing profits than their Japanese rivals and so likely to avoid the slide in Japanese equities, said Bellefleur. While the Euro Stoxx 50 (SX5E) index is 25 percent below its level at the start of 2008, the Nikkei 225 Stock Average (NKY) is still 60 percent below its 1989 peak.

The analysis is echoed by van Vliet in Amsterdam. He notes Europe’s economy is in recovery, albeit a slow one. It’s not stuck in a deflationary recession as Japan was and its population is ageing less dramatically.

Another key difference is that Europe is more open to foreign trade with exports totaling 27.1 percent of gross domestic product in 2013 compared with Japan’s 16.2 percent, according to ING.

“That said, complacency should be avoided,” said van Vliet. “If deflation is indeed averted, this is likely to require a prolonged period of ultra-low interest rates, and, perhaps further easing by the ECB.”

To contact the reporter on this story: Simon Kennedy in London at skennedy4@bloomberg.net

To contact the editors responsible for this story: James Hertling at jhertling@bloomberg.net Andrew Atkinson

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