Why Japanification and Secular Stagnation Are Bad, Bad News

(Bloomberg) -- Even before the coronavirus delivered a body blow to the global economy, Mario Draghi, the former European Central Bank president, was sounding alarms about “Japanification.” Janet Yellen, the former U.S. Federal Reserve chair, warned of “secular stagnation.” They’re not the only ones who lately have been using these overlapping if somewhat obscure terms. They do, however, point to the same conclusion: Fiscal policy is needed where monetary policy has faltered. That is, that elected officials who hold their nation’s purse strings can’t count on central bankers to bail out faltering economies forever.

1. What is Japanification?

It’s a term used by economists to describe a state of chronically anemic economic growth and feeble inflation or even deflation similar to the conditions faced by Japan since a giant real-estate bubble popped in the early 1990s. It’s used to convey the alarming prospect -- often discussed in Europe, which has staggered economically ever since the 2008 financial crisis -- of sluggishness so deep that it is extremely difficult to escape. Even after Japan’s central bank embraced two extraordinary forms of monetary stimulus -- negative interest rates and asset purchases worth more than the entire size of the world’s third-largest economy -- the country has yet to return to a positive growth cycle strong enough to generate 2% inflation after nearly three decades.

2. What is secular stagnation?

It’s a term originally coined by the Harvard economist Alvin Hansen in the 1930s to describe the tendency of mature industrial economies to move toward instability in the absence of large amounts of public investment. It echoed the ideas laid out by John Maynard Keynes in his seminal 1936 treatise, “The General Theory of Employment, Interest and Money.” At the time, the global economy was mired in a deep depression, and theories like Keynes’s and Hansen’s offered an explanation and a prescription for the way out. In recent years, amid rock-bottom interest rates in the wake of the biggest global downturn since the 1930s, another Harvard economist -- former U.S. Treasury Secretary Lawrence Summers -- revived the phrase to capture basically the same idea.

3. Are they the same thing?

Essentially, yes. Japanification can be seen as a subset of secular stagnation, with characteristics matching those that have specifically plagued Japan. The country’s rapidly aging and shrinking population has contributed to the slowdown of economic activity, and to a high saving-low investment environment despite ultra-low interest rates. The Bank of Japan also complains about a deflationary mindset that has taken hold of consumers and companies that inhibits higher spending or higher prices. Japan’s example offers other countries an unsettling vision of their possible future. “We’re essentially at the Japanese place,” Summers told Bloomberg Television on March 12. “That’s a place that’s very hard to get out of.”

4. Why are they in the news now?

Because low growth and low inflation are affecting a much wider range of countries -- and that was before the coronavirus crisis drove stocks in the U.S. and elsewhere into a bear market and briefly sent yields on every Treasury bond crashing below 1%. When the Federal Reserve eased policy in an emergency move on March 3, it did little to reassure markets, which were even more underwhelmed by the ECB’s crisis response package. It’s becoming clear that monetary authorities are reaching the limits of their policy powers, leaving the onus on governments. A fall in sovereign bond yields below zero in Europe to mirror those of Japan has also added to the impression that the euro region could be getting dragged closer toward a Japan-style policy black hole.

5. Why do they both point to fiscal stimulus?

Since the 1980s, the success of the Fed and other central banks in driving down inflation by pushing up interest rates has led to a widespread belief that monetary policy is the best way to manage economic fluctuations. By influencing the overall cost of credit in the economy, central banks manipulate the incentives for businesses to stimulate growth by investing and hiring, while leaving decisions on what to spend on and how much in the hands of the private sector. But after the 2008 crisis, central banks found that even cutting rates to zero didn’t provide enough of a jolt to restore growth; that’s why they bought trillions of dollars of bonds and cut some rates below zero. Concepts like Japanification and secular stagnation mesh with a growing realization of the diminishing returns of monetary policy. A growing number of policy makers and economists point to the need for governments to take some investment and hiring decisions into their own hands to achieve and maintain robust growth.

6. How does fiscal stimulus work?

It involves governments running budget deficits or heading in that direction -- via increased spending and investment, or reduced taxation, or both -- to boost economic activity. That’s why in Europe, Draghi’s successor, Christine Lagarde, has long argued for governments with the capacity to spend to play their part in supporting monetary policy. In light of the coronavirus tumult, she called for “an ambitious and coordinated fiscal policy response.” Japan has announced additional stimulus to deal with the coronavirus fallout, but the government is facing calls for more. In the U.S., Fed Chair Jerome Powell has noted that rate cuts can’t fix supply chains thrown into chaos by the pandemic. President Donald Trump has promised a stimulus package but provided few details. Fiscal stimulus in response to the Great Depression came in the form of massive spending programs, but in recent decades it’s more often been undertaken through tax cuts. That approach preserves the private sector’s role as the primary allocator of economic resources in society, but it doesn’t necessarily give the government as much bang for its buck.

The Reference Shelf

  • A QuickTake on why the Fed is rethinking its toolkit.
  • Former Treasury Secretary Lawrence Summers’ dismissal of Ben Bernanke’s optimism over central banks’ capabilities.
  • A story on who Lagarde may be eyeing within the euro area to spend more.
  • A global guide to stimulus plans in 2020.

©2020 Bloomberg L.P.

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