In this week's Fundamentals briefing, Legal & General Investment Management's (LGIM) Economist James Carrick compared the conditions that led to Japan's ‘lost decade' and examined whether the UK was at risk of seeing something similar.
"Japan was the success story of the 1960s, 1970s and 1980s but the bubble then burst with such force that authorities are still trying to engineer a sustained recovery" said James. "Many economists fear that the legacy of the 2008 financial crisis will be a similarly prolonged period of poor or non-existent growth in the UK and elsewhere."
LGIM looked at five key factors that together accounted for Japan's poor growth in the aftermath of the crash of the late 1980s - demographics, competitiveness, credit creation, fiscal policy and export markets - and looked at their likely impact on the UK today.
"Understanding Japan's weaknesses gives an insight into the future for the UK economy. For example, we found that demographics accounted for around half of the Japanese slowdown as working population growth went into reverse. If we look at the UK, immigration and rising retirement ages mean that the working population is growing - providing a tailwind for economic growth" explained James.
The ‘zombie' banks were also a well-publicised element of weak Japanese growth: by failing to take swift action to recapitalise its banking sector, credit creation was hampered. In the UK, the swift reduction in interest rates, quantitative easing and taking difficult decisions on weak banks earlier have created conditions where lending can increase.
"Regulation and bureaucracy is another area where the UK scores favourably. The Japanese service sector was heavily regulated, stifling innovation, flexibility and competitiveness. The UK's service industries are far more competitive and again consistently help boost growth."
"It's not one-way traffic though. Japan had two significant advantages in the 1990s that are not open to the UK today. First, Japan could rely on strong exports at a time of buoyant global growth. Global conditions are obviously more lacklustre now. Second, Japan could use fiscal policy aggressively to try to boost growth. With the UK determined to cut public deficits, this option is not open today" continued James.
"On balance though, we are confident that the UK is not going to experience a Japanese-style slowdown" finished James. "We believe the UK is more dynamic, with a stronger banking system and more supportive demographics. Interestingly, we find a similar picture in the US, although the euro zone outlook is less positive."
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