Conjoncture

The Eurozone: a new Japan?

The slowdown in economic activity in the Eurozone and inflation structurally below the  
target rate have raised the spectre of “Japanification”. This would mean effective growth  
running below potential, very low interest rates and negative inflation. In Japan, this  
combination of factors resulted from the bursting of the financial and real estate bubbles of  
the early 1990s. There is a range of factors that could cause “Japanification”. Faced with the  
challenges of an ageing population and slowing productivity gains, the Eurozone will need  
to focus its efforts on boosting its potential growth and its resilience to shocks. Short- and  
medium-term economic policy choices will therefore be crucial in limiting, as far as possible,  
the risk of “Japanification”.  
p.2  
p.4  
p.7  
The Japanese economy  
struggled to recover  
The Eurozone is suffering but  
showing resistance  
Choices need to be made in  
the Eurozone  
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Conjoncture // November 2019  
economic-research.bnpparibas.com  
The slowdown in economic activity in the Eurozone and inflation structurally below the target rate have raised the spectre of  
Japanification. This would mean effective growth running below potential, very low interest rates and negative inflation. In Japan, this  
combination of factors resulted from the bursting of the financial and real estate bubbles of the early 1990s. There is a range of factors  
that could cause Japanification. Faced with the challenges of an ageing population and slowing productivity gains, the Eurozone will  
need to focus its efforts on boosting its potential growth and its resilience to shocks. Short- and medium-term economic policy choices  
will therefore be crucial in limiting, as far as possible, the risk of Japanification.  
The ‘Japanese Syndrome’ can be defined as a combination of three in 1990, from around 140% at the beginning of the 1980s. The country  
1
economic phenomena : a real-terms actual growth rate below the saw particularly high credit growth (15% year-on-year at the end of the  
potential growth rate (g<g*); a zero policy interest rate in nominal terms 1980s).  
2
or a real natural interest rate below zero; and negative inflation  
These trends encouraged the acquisition of financial market securities  
and real estate, pushing prices up (Chart 1). As a result, the market  
(
deflation).  
Is the Eurozone heading for this kind of scenario? Increasingly capitalisation of listed companies in Japan increased fourfold over the  
discussed, the issue of Japanification in the Eurozone has now 1980s, reaching around 140% of GDP by the beginning of the 1990s.  
assumed a particular importance given the ongoing economic slowdown An increase in the value of collateral tends to increase the solvency of  
which could deteriorate still further  and the weakness of inflationary borrowers, which appears as a risk-free gain, further fuelling growth in  
pressures, despite significantly accommodative monetary policy. More bank lending. Meanwhile, agents in the banking system face a more  
broadly, the Eurozone has seen stop-start economic trends since its competitive environment and adopt a more aggressive lending policy,  
creation, and since the crisis of 2008 appears to have slipped into a focusing on the real estate and financial markets, thus boosting the  
4
regime of lower growth. A similar phenomenon has also been observed valuation of such assets .  
in other developed economies. For its part, Japan’s economic history  
since the financial deregulation of the 1980s has seen a number of  
Burst of stock market and real estate bubbles  
major shocks: the bursting of the real estate and financial bubbles in the  
early 1990s, from which the economy struggled to recover; the Asian  
crisis a few years later; and the great financial crisis of 2008-2009.  
Commercial land prices (100=Q1 2010)  
Nikkei 225 (RHS)  
4
00  
00  
40 000  
30 000  
20 000  
10 000  
0
How has the Japanese economy remained over a long period in a  
position of weak growth, particularly low policy rates and low, or even  
negative, inflation? Is the Eurozone now suffering from the same  
macroeconomic weaknesses? This article will examine these questions  
and will attempt to outline the macroeconomic profile of the Eurozone.  
We will highlight both similarities and differences between the Eurozone  
and Japanese economies.  
3
200  
100  
0
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18  
Chart 1  
Source: Japan Real Estate Institute, Datastream  
Over the course of the 1980s, economic growth clearly assisted these  
favourable conditions for financing. GDP growth, in real terms, was  
particularly robust and averaged 4.5% over the period. Japanese per  
capita GDP also rose strongly, gaining an average of over 4% over the  
same period.  
The financial deregulation in Japan during the 1980s and the overall  
relaxation of monetary policy encouraged a fall in bond yields and, more  
generally, a significant easing of credit conditions. The degree of  
relaxation of monetary policy drove rapid growth in credit, with  
3
outstanding loans in Japan rising to more than 210% of nominal GDP  
At the end of the 1980s, as inflationary pressures rose, there was a  
widespread increase in interest rates in advanced economies. This  
contributed to a downturn in asset markets. The Japanese economy  
1
T. Ito, Japanization: Is it endemic or epidemic ?, NBER, February 2016  
The natural interest rate is the real interest rate at which inflation remains stable  
2
whilst actual GDP growth is at its potential level (the output gap is zero) in the  
absence of any temporary shocks.  
We are considering here total credit to the non-financial private sector.  
4 E. Dourille-Feer et al., La crise japonaise, ou comment un pays riche s’enlise dans  
la déflation, CEPII, 2002  
3
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Conjoncture // November 2019  
economic-research.bnpparibas.com  
suffered the abrupt bursting of the real estate and equity bubbles, with uncertainty took hold. These events hit investment (Chart 3) and the  
market capitalisation dropping to below 60% of GDP in 1992. In addition, labour market, damaging private consumption in its turn.  
growth in credit fell sharply in the early 1990s (Chart 2), dropping below  
Sharp decline in investment in the late 1990s  
1
% y/y by the end of 1996 and remaining weak thereafter. Credit shrank  
nearly continuously from early 1997 to the end of 2012 (Chart 2).  
y/y, %  
Total investment in volume  
1
2
8
4
0
4
Unlike other countries that have experienced similar crises but have  
recovered from the shocks relatively quickly, Japan suffered from poor  
macroeconomic conditions for a long time. One of the explanations for  
Japan’s failure to recover was the slow and timid response from the  
authorities when it came to economic policy and the stabilisation of the  
banking system. On this point, Sweden is often identified as a counter-  
5
example . Following the economic and banking crisis that hit the country  
-
in the early 1990s, the Swedish authorities responded immediately in  
order to address imbalances in the banking sector, through restructuring  
and the creation of ‘bad banks’. Conversely, in Japan, the high level of  
non-performing loans on bank balance sheets was not addressed  
sufficiently quickly, hitting credit growth, domestic demand and,  
eventually, prices and growth.  
-8  
-
12  
9
5
97 99 01 03 05 07 09 11 13 15 17 19  
Source: Cabinet Office  
Chart 3  
A significant and prolonged weakening of credit dynamic  
Credit growth to the non-financial sector(y/y,%, RHS)  
Credits to the non-financial private sector (% of GDP)  
The deterioration of macroeconomic conditions (Japan went into  
recession in early 1998), against a background of falling domestic  
demand, hit prices. An increase in the consumer tax (equivalent to  
value added tax or VAT) in April 1997 also hit consumer spending, with  
2
2
2
1
1
1
1
1
1
20  
10  
00  
90  
80  
70  
60  
50  
40  
15  
1
5
0
0
8
some observers criticising the primary structural adjustment that Japan  
introduced in that year. Meanwhile the monetary policy response took  
the form of a very gradual reduction in the policy rate. This fell to 0% by  
the end of 1999, from a peak of 6% some 8 years earlier. The country  
nevertheless fell into a liquidity trap, with the Bank of Japan’s supply of  
money at zero rates no longer having an effect on prices or economic  
-
5
-10  
activity. Other than in 2008, on the eve of the financial crisis, deflation  
81  
84 87 90 93 96 99 02 05 08 11 14 17  
9
(
in the sense of underlying inflation ) took root in Japan between the  
Chart 2  
Source: BIS  
late 1990s and the middle of 2013 (Chart 4). Falling prices tend to wipe  
out the positive effect of lower nominal interest rates, by pushing real  
interest rates upwards.  
The crisis that hit East Asian countries in 1997 represented a further  
shock for Japan, where macroeconomic imbalances had still not been  
absorbed. Emerging Asian countries saw their economic growth dip  
significantly over this period. At the end of 1997, the bankruptcy of  
Yamaichi, one of the country’s biggest securities firms, increased  
instability in financial markets and Asian forex markets, triggering a  
Weak domestic private demand, reflecting the deleveraging of  
economic agents, partly explains the long period of deflation  
experienced in Japan. But there were other more structural  
macroeconomic factors that flesh out the explanation. Growing  
competition from other Asian countries and emerging economies,  
together with the increasing duality of the labour market, with rising  
numbers of workers in insecure jobs, put pressure on wages and prices.  
In addition, the deflationary climate encouraged risk-averse, wait-and-  
6
chain reaction of bankruptcies at financial institutions . The very limited  
7
monetary policy response did not fully address the substantial demand  
for liquidity that resulted. As a result, the Japanese financial system  
looked vulnerable and the banking system continued to struggle with  
high levels of non-performing loans. A short but significant period of  
panic was triggered, with the equity market falling again and deposit  
withdrawals further weakening Japanese banks. Widespread  
1
0
see behaviours . Lastly, the ageing of the Japanese population (to  
which we will return later) also put downward pressure on growth and  
inflation. Demographic trends in Japan have, for instance, driven down  
8
The primary structural adjustment represents the change in the primary structural  
budget balance, that is to say corrected for cyclical effects.  
9
The measure of underlying inflation excludes products with volatile prices, such as  
5
La crise nordique des années 1990, Séminaire scandinave, DG Trésor April 2012  
6
Statement by the Governor concerning the Yamaichi Securities Co., Bank of Japan, oil products and food. The underlying inflation index thus helps identify underlying  
2
7
June 1999  
See footnote, page 4  
trends in price movements.  
E. Dourille-Feer, La difficile sortie de la déflation au Japon, Billet du CEPII, 2014  
10  
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economic-research.bnpparibas.com  
land prices (which have not recovered since the bursting of the real  
estate bubble, Chart 1) . The negative wealth effect that resulted  
depressed demand and ultimately prices.  
Nominal stagnation of the Japanese GDP  
1
1
Yen Bn  
00 000  
Nominal  
Real  
6
Deflation sets in from the 2000s  
550 000  
Short-term real interest rate  
Total inflation (y/y,%)  
Core inflation (y/y,%)  
500 000  
450 000  
1
0
9
8
7
6
5
4
3
2
1
0
1
2
3
4
Short-term nominal interest rate  
400 000  
350 000  
3
00 000  
50 000  
2
200 000  
1980  
1986  
1992  
1998  
2004  
2010  
2016  
-
-
-
-
Chart 5A  
Source: Cabinet Office  
Expansion, crash, deflation, recovery  
1
980 1984 1988 1992 1996 2000 2004 2008 2012 2016  
Chart 4 Source: Bank of Japan  
Real GDP growth  
Growth of the GDP deflator  
Nominal GDP growth  
Note: Both total inflation and underlying inflation have been adjusted for  
changes in indirect taxes. The real interest rate is deflated by the total inflation  
rate (adjusted)  
%
7
6
5
The major economic crisis of 2008-09 caused a third significant shock  
to the Japanese economy. Growth in Japan was hit particularly hard,  
with contraction of 1.1% in 2008 and then 5.5% in 2009, before  
rebounding in response and then getting carried forward by the  
introduction of ‘Abenomics’ 12 . This brought about economic  
improvements, most notably the end of deflation, one of the  
programme’s priorities, and a recovery in economic activity. Inflation  
and growth have nevertheless remained at low levels, despite the  
extremely high levels of public debt (gross public debt is close to 240%  
of nominal GDP) and monetary accommodation, specifically through the  
launch of a Quantitative Easing programme (the Bank of Japan’s  
balance sheet is now 100% of the country’s GDP and continues to  
expand).  
4
3
2
1
0
-1  
-2  
1
981-1990  
As s e t sa pprec i at io n St o ck mar ket c rash  
1991-1999  
2000-2011  
Deflation  
2012-2018  
Abenomics  
Chart 5B  
Source: Cabinet Office  
In total, Japan’s nominal GDP was more or less stable from the early  
1990s until the introduction of Abenomics (Chart 5). This reflected both  
limited growth in volume terms and the weak, or negative, growth in  
prices. Volume growth fell very sharply after the 1980s, to an average of An environment of low inflation, feeble economic growth, negative  
less than 1% in the 2000s, whilst the GDP deflator averaged -1.2% over interest rates across a fairly wide range of maturities, non-conventional  
this period. Since 2012, the recovery has been noticeable but timid. On monetary policy, decreasing but still high government debt, and  
average, growth in real terms has been barely above 1%. In addition, structural weaknesses (ageing population, slowing growth in total factor  
prices have risen on average, but again this has been a slow process productivity,) provide a combination of factors for the Eurozone  
(
Chart 5b).  
economy that might, at first sight, tempt one to draw parallels with the  
macroeconomic situation in Japan.  
Japan’s experience of deflation is unique in recent economic history.  
The bursting of the financial and real estate bubbles, and the only Over the past 20 years, since the creation of the single currency,  
partial response of economic policy, still weigh heavily on the economy.  
economic activity in the Eurozone has had a bumpy ride, hit by two  
crises and two recessions of different magnitudes. In 2009, the zone’s  
economy saw a real terms contraction of 4.5%, whilst the debt crisis  
saw GDP shrink by 0.9% in 2012 and 0.2% in 2013. However, the  
Eurozone enjoyed a notable recovery in nominal terms after 2009,  
despite a second crisis a few years later (Chart 6).  
1
1
D. Anderson et al, Is Japan’s population aging deflationary ?, IMF working Paper,  
August 2014  
Introduced in Japan in 2012, the ‘Abenomics’ stimulus programme has three  
1
2
pillars: an expansionist fiscal policy, a non-conventional monetary policy (including  
purchasing of long-term sovereign debt) and structural reforms, in particular to  
address the ageing of the population.  
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Conjoncture // November 2019  
economic-research.bnpparibas.com  
On average, prices continued to rise after the 2008 crisis but at a slower  
pace (Chart 7). The trend in the GDP deflator has remained constrained,  
but has not fallen significantly (on average, the GDP deflator has risen  
by a little over 1% since the 2008 crisis). Economic activity, meanwhile,  
slowed significantly, as it did in Japan, after the subprime crisis, and the  
zone appears to have been under a low-growth regime since then.  
GDP growth per capita in real terms  
Japan  
Eurozone  
2
1
1
.0 %  
.5  
A fragile nominal recovery in Japan  
.0  
Nominal GDP - Japan  
Real GDP - Japan  
Nominal GDP - Eurozone  
Real GDP - Eurozone  
100 = onset of the crisis  
125  
120  
115  
110  
105  
100  
0.5  
0.0  
1990-1999  
2000-2007  
2011-2018  
Chart 8  
Source: AMECO European Commission  
Southern Europe is catching up painfully  
9
5
0
number of years before/after the crisis  
Nominal GDP, 100 = onset of the crisis  
9
110  
108  
106  
104  
102  
100  
Japan  
Italy  
Spain  
-
2 -1 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20  
Source: Cabinet Office, Eurostat  
Chart 6  
Note: The basis of 100 corresponds to the start date of the crisis (1992 for  
Japan and 2008 for the Eurozone). The x-axis shows the number of years  
before or after the onset of the crises. Thus, 20 years after the crisis, Japanese  
nominal GDP was barely back to its 1992 level.  
98  
96  
94  
92  
90  
Significant slowdown in activity in the Eurozone but no deflation  
number of years before/after the crisis  
Real GDP growth  
Growth of the GDP deflator  
Nominal GDP growth  
-
2 -1 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20  
Source: Cabinet Office, Eurostat  
5 %  
Chart 9  
4
3
2
1
0
One of the initial causes of the prolonged difficulties in the Japanese  
economy lay in the bursting of asset bubbles, particularly the real estate  
bubble (see Chart 1 above). The lack of any rebound in prices is  
symptomatic of the situation in the Japanese economy since the early  
1990s. And this is one of the differences between macroeconomic  
trends in Japan and in the Eurozone. The Eurozone, taken as a whole,  
in contrast to Japan, has seen only a modest fall in asset prices, notably  
for residential real estate. These were fairly stable overall between 2007  
and 2015, admittedly after significant increases over the course of the  
1999-2007  
2008-2018  
Source : Eurostat  
Chart 7  
2000s. In 2015, real estate asset prices started to rise again (Chart 10).  
The slowdown, or indeed decrease, in the supply of credit (2009 and  
the second half of 2013) came alongside the fall in real estate prices.  
Growth in credit has resisted, however, despite the difficulties in certain  
banking sectors, particularly in southern European countries. The  
On a per capita basis, over the post-crisis period, growth in real GDP  
was weak in the Eurozone just as it was in Japan, where moreover it  
displayed a remarkable stability (Chart 8). The aggregate figures for the  
Eurozone mask significant national differences. In particular, the  
countries of southern Europe, particularly Italy and Spain, were hit  
harder by the 2012 debt crisis and endured two consecutive deep  
recessions (Chart 9). In real terms, Italy (unlike Spain) had not returned  
to its 2008 GDP level by 2018.  
1
3
narrow M1 measure of money supply , provides a good indicator of the  
14  
slowing of economic growth or recession in the Eurozone , given that  
its growth also fell during the two crises and then recovered rapidly.  
1
1
3
4
M1 money supply includes notes and coins in circulation and sight deposits.  
R. Fendel et al, Predicting recessions using term spread at the zero lower bound:  
The case of the euro area, VOX CEPR, January 2019  
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Conjoncture // November 2019  
economic-research.bnpparibas.com  
Credit in the Eurozone: growth weakened but positive  
natural short-term rate in the Eurozone is now zero or even in negative  
16  
territory .  
Credit growth to the non-financial private sector (y/y, %)  
Residential real estate price (2015=100, RHS)  
Sovereign bond yields by maturity  
1
2
0
8
6
4
2
0
2
120  
115  
110  
105  
100  
95  
Country  
Germany  
Netherlands  
Finland  
Austria  
2 y  
5 y  
10 y  
30 y  
-0.106  
-0.078  
0.175  
0.261  
0.58  
1
-0.782  
-0.754  
-0.709  
-0.698  
-0.689  
-0.699  
-0.215  
-0.499  
-0.624  
-0.803  
-0.726  
-0.667  
-0.618  
-0.572  
-0.654  
0.264  
-0.301  
-0.28  
-0.595  
-0.452  
-0.329  
-0.333  
-0.268  
-0.297  
0.846  
0.135  
0.12  
Belgium  
France  
90  
0.549  
1.969  
1.025  
1.044  
-
85  
05  
06 07 08 09 10 11 12 13 14 15 16 17 18 19  
Italy  
Chart 10  
Source: BIS, Eurostat  
Spain  
Portugal  
Table 1  
Source: Thomson Reuters  
Note : red figures indicate negative sovereign yields at 8 October 2019.  
If the downward trend in interest rates appears steeper since the 2008 As in Japan, the Eurozone is affected by this widespread downward  
crisis, the fall in long term rates is a long-term phenomenon (Chart 11). trend in interest rates. Across a broad range of maturities, yields on the  
Real interest rates are now at historic lows in advanced economies and Eurozone’s sovereign bonds - some of which are viewed as risk-free  
have been falling for several decades. This trend has been broadly and highly liquid - have been very low, or even negative in many  
synchronised between the advanced economies, in association with the member states. In 2019, the Dutch and German yield curves, for  
growing integration of global capital markets since the wave of example, have moved fully into negative territory. On some estimates,  
1
5
deregulation that began in the 1980s .  
the total value of bonds with negative yields, both sovereign and  
corporate, stood at some USD 15 000 billion, marking a substantial  
increase since 2015-16 . Many other countries, including France,  
Finland and Belgium, have also seen bond yields drop particularly low  
(Table 1). Despite political tension, Italy has also seen a narrowing of its  
spread, albeit without moving into negative territory. Having stabilised  
overall between late-2016 and late-2018, rates have started falling  
again. Against the background of the marked slowdown in the Eurozone  
since Q3 2018, investors have, indeed, been taking an increasingly  
cautious stance.  
Downward trend in long term interest rates  
10 years in nominal terms since 1980)  
17  
(
Germany  
%
Japan  
Spain  
France  
United States  
1
8
6
4
2
0
8
6
4
2
0
2
Italy  
United Kingdom  
1
1
1
1
At present, both the Bank of Japan (BoJ) and the European Central  
Bank (ECB) have taken their policy rates below zero (Chart 12). For the  
BoJ, the policy rate was cut to 0% in 1999, several years after the  
bursting of the asset bubbles, and then rose briefly between August  
2000 and February 2001. As discussed above, some of these rate  
movements reflected the BoJ’s failure to adequately respond to the  
deterioration of the economic situation. By prematurely anticipating a  
rebound in activity, monetary policy choices are one of the most likely  
-
1
980 1984 1988 1992 1996 2000 2004 2008 2012 2016  
Chart 11 Source: Central Banks  
1
8
The inexorable fall in long-term interest rates can in part be explained causes of the period of deflation .  
over the relatively recent past by expansion in money supply. More  
fundamentally, the fall in real rates is often associated with a drop in the  
natural rate (r*) for structural reasons. The ageing of the population, the  
high and rising savings rate, the slowdown in productivity gains,  
inequality and an increase in risk aversion are all deep-seated changes  
that can affect interest rate movements. On certain estimates, the real  
16  
C. Brand et al, The natural rate of interest: estimates, drivers, and challenges to  
monetary policy, ECB Occasional Paper Series, December 2018  
1
7
T. Adrian and F. Natalucci, Lower for longer: Rising vulnerabilities may put growth  
at risk, IMF Blog, October 2019  
1
8
T. Ito & F. Mishkin, Two decades of Japanese monetary policy and the deflation  
problem, NBER, 2004  
1
5
M. Del Negro et al, Global trends in interest rates, VoxEU, November 2018  
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Conjoncture // November 2019  
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Main interest rates : Bank of Japan & European Central Bank  
%
Japan  
Eurozone (Main rate)  
Eurozone (Deposit rate)  
1
0
9
8
7
6
5
4
3
2
1
0
1
2
1
In line with the method adopted by Ito (2016) , we have constructed a  
simple index of Japanification for the Eurozone (Charts 14a and 14b).  
To calculate this we have taken the unweighted aggregate of the three  
characteristic features of the Japanese Syndrome: (i) the gap between  
actual real growth and potential growth (g-g*); (ii) total inflation (π, year-  
2
2
on-year); and (iii) main policy rate , indicated as i.  
Japanification index =  
-
Growth gap (g-g*) + Total inflation (n) + Policy rate (i)  
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016 2019  
Chart 12 Source: Bank of Japan, ECB  
The Japanification index for the Eurozone has been on a downward  
trend. Having contributed to its high pre-crisis level, inflation and interest  
rates have tended to contribute to its drop since the crisis. The index  
remains above that for Japan. In Japan, inflation, or deflation, has often  
worked to drag down the overall index since the end of the 1990s.  
Faced with the absence of any reaction in inflation, the scaling back of  
inflation expectations, and nominal interest rates at their floor, the  
central banks triggered so-called ‘non-conventional measures, the most  
noticeable of which were massive asset purchasing programmes. The  
swelling of balance sheets (Chart 13) and the stock of securities held at  
the BoJ (via Quantitative and Qualitative Monetary Easing) and the ECB  
If we include real estate prices in the index (Charts 14c and 14d), the  
gap between the Eurozone and Japanese economies widens. As  
discussed above, growth in real estate prices resumed relatively rapidly  
in the euro area, against a background of monetary easing, whilst in  
Japan they remained relatively inert following the bursting of the bubble  
in the early 1990s.  
(
Asset Purchases Programme) exerted downward pressure on long-  
term interest rates, notably through a reduction in the net volume of  
securities available to private investors 1 . The introduction of this  
programme in the Eurozone came at a time when inflation had slipped  
into negative territory (the inflation rate in the zone was temporarily  
negative from the end of 2014 to the beginning of 2015). Overall, the  
ECB’s non-conventional monetary policy interventions have had  
9
Although the Eurozone seems to be resisting the “Japanification” for the  
time being, its future is less clear. The ageing population, the slowdown  
in productivity gains and the absence of any further deepening in the  
construction of the Eurozone could all have a lasting effect on the  
zone’s economy and increase the risk of “Japanification”.  
2
0
favourable effects on economic activity and price trends .  
Increase in Central Banks' balance sheets  
Synthetic index of "japanification"  
Delta (g-g*)  
Inflation (π, y/y)  
Main rate (i)  
Index  
%
of GDP  
Japan  
Eurozone  
1
20  
00  
6
4
2
0
2
4
Japan  
1
8
6
4
2
0
0
0
0
0
-
-
-6  
-
8
1
992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018  
99  
01  
03  
05  
07  
09  
11  
13  
15  
17  
19  
Chart 13  
Source: Bank of Japan, ECB  
Chart 14A Source Bank of Japan, ECB, Eurostat  
Note: the closer the index gets to 0, the greater the extent of “Japanification”.  
1
9
L’arrêt des achats nets d’actifs ne met pas fin au quantitative easing, Jean  
Dalbard, et al., Banque de France, December 2018  
2
0
21  
Monetary policy and below-target inflation, speech by Philip R. Lane, Bank of  
Finland, July 2019  
See footnote, page 1  
22 For this rate in the Eurozone we have used the Deposit Facility Rate (currently at -  
0.5%). For Japan, the rate used is the Overnight Call Rate, currently at -0.1%.  
8
Conjoncture // November 2019  
economic-research.bnpparibas.com  
Synthetic index of "japanification"  
Delta (g-g*)  
Inflation (π, y/y)  
Eurozone  
Main rate (i)  
Index  
When it comes to the engines of long-term growth in the Eurozone, the  
stars do not appear well-aligned. First, the issue of an ageing population  
is becoming ever more challenging. Although Japan is one of the ‘oldest’  
countries in the world, the share of over-65 in the Eurozone population  
is also trending upwards (Chart 15).  
8
6
4
2
0
2
4
6
Share of the population aged 65+ in the total population  
-
-
-
%
Japan  
Eurozone  
30  
28  
26  
24  
22  
20  
18  
16  
1999 2001 2003 2005 2007 2009 2011 2013 2015 2017  
Chart 14B Source: Bank of Japan, ECB, Eurostat  
Synthetic index of "japanification" with real estate prices  
Delta (g-g*)  
Inflation (π, y/y)  
14  
Main rate (i)  
Index (with real estate prices)  
Real estate prices (y/y)  
1
2
6
4
2
0
2
4
6
8
1996  
1999  
2002  
2005  
2008  
2011  
2014  
2017  
Japan  
Chart 15  
Source: AMECO European Commission  
Eurozone growth in the working-age population (which we define here  
as people between 15 and 64) started to fall in 2011. In Japan, this  
section of the population has been shrinking continuously since the mid-  
-
-
-
-
1
990s (Chart 16). In the Eurozone, the overall trend obscures  
differences from one member state to the next. The working-age  
population has shrunk in both Italy and France since 2015, whilst in  
Germany it has seen a return to growth since 2013, due notably to  
migration flows, after a long period of decline. Meanwhile, the share of  
over-65 in the populations of Germany and Italy are above the  
Eurozone average.  
-
-
10  
12  
1
992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018  
Chart 14C Source: Bank of Japan, ECB, Japan Real Estate Institute, Eurostat  
Growth rate of the working-age population (15-64)  
Synthetic index of "japanification" with real estate prices  
Japan  
Eurozone  
%
Delta (g-g*)  
Main rate (i)  
Index (with real estate prices)  
Inflation (π, y/y)  
Real estate prices (y/y)  
0
.5  
.0  
1
5
0
5
0
5
Eurozone  
0
1
-
-
-
0.5  
1.0  
1.5  
-
1996  
1999  
2002  
2005  
2008  
2011  
2014  
2017  
-
10  
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018  
Chart 16  
Source: AMECO European Commission  
Chart 14D Source: Bank of Japan, ECB, Japan Real Estate Institute, Eurostat  
The ageing population and the shrinking of working-age population  
have reduced the available workforce and could also hold back capital  
accumulation. These demographic trends, with unchanged policies and  
9
Conjoncture // November 2019  
economic-research.bnpparibas.com  
productivity trends, will have negative effects on economic growth over Given a level of economic openness (ratio of exports to GDP by value)  
the short and medium terms. On certain estimates, potential growth in of nearly 50%, the Eurozone is directly affected by these trends.  
2
3
the Eurozone will be lacklustre in future years at around 1.4% . This  
would nevertheless put it above potential growth in Japan (estimated at  
around 0.5% in the medium term).  
Alongside the loss of demographic vitality, the slowdown in productivity  
gains could act as a brake on long-term growth.  
The growth profile of the Eurozone over the medium term will depend  
on its ability to meet the next shock it faces. Its authorities will have to  
avoid the economic policy errors of the past. On the monetary front, for  
example, an excessively rapid or abrupt tightening, such as that carried  
out in 2011, could weaken the Eurozone still further. Fiscal policy,  
meanwhile, will have to play a greater counter-cyclical role than it did  
during the 2012 crisis for example. At that time, the Eurozone (on an  
aggregated level) carried out a structural primary adjustment even  
though it had not yet seen a return to growth.  
Evolution of total factor productivity  
100=1996  
Japan  
Euro area  
112  
110  
108  
106  
104  
102  
100  
Today, the issue is one of the limited room for manoeuvre in both  
monetary and fiscal policy. Now constrained, it would seem difficult for  
the ECB to make another massive intervention on the scale of that  
conducted by the BoJ, whose balance sheet, we should remember, is  
now equivalent to nearly 100% of the country’s GDP. On the fiscal front,  
European rules inhibit a sufficiently flexible approach in the event of a  
contraction in economic activity. Although total debt in the Eurozone has  
trended downwards since late 2014, it remains high in several member  
states. Completing the architecture of the Eurozone thus looks like the  
best way of avoiding a prolonged impact from any fresh economic  
downturn in the currency area. In particular, greater fiscal integration  
across the Eurozone, through the creation of a macroeconomic  
9
8
6
9
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018  
Chart 17 Source: AMECO European Commission  
Although certain analyses predict only a temporary slowdown in  
productivity gains, other more pessimistic work suggests a structural  
2
5
stabilisation mechanism, looks necessary . Combined with continued  
fiscal consolidation during expansionary periods, such a tool would  
allow a better balance in the policy-mix and increase the impact of  
monetary policy. To avoid slipping into Japanification, Eurozone  
member states will need a coordinated, committed and disciplined  
approach.  
2
4
weakening of productivity growth .  
Lastly, on a demand-based approach, the Eurozone could be lastingly  
affected by a structural slowdown in global trade (Chart 18). Weaker  
trade growth since the end of 2018 lies in a longer-term pattern of  
slowing trade under the effect of a number of factors such as the ending  
of the fragmentation of value chains, a pause in the integration of global  
trade, lower trade intensity in economic growth which is now turned  
more towards services and consumption, and so on.  
***  
The debate about “Japanification” spreading to the Eurozone is not over.  
This article has attempted to provide an overall macroeconomic profile  
of the Eurozone, highlighting both similarities and differences between it  
and Japan. Whether it is unavoidable or not, the Japanification of the  
Eurozone would clearly have significant economic consequences. If  
actual growth is below potential for a long period, for example, this  
could trigger a deflationary spiral which in turn would have damaging  
consequences for growth. Elsewhere, the current climate of low interest  
rates could persist and already some are highlighting their negative side  
effects. From a macroeconomic viewpoint, low interest rates might skew  
the perception of risk, destabilise the balance between savings and  
investment or encourage the financing of less productive activities. This  
situation could persist given the limited inflationary pressure, which itself  
is raising questions about the appropriate central bank response. All of  
these mechanisms are worthy of in-depth examination and we will be  
paying them particularly close attention.  
Growth rate of world trade  
y/y, %  
2
1
1
0
5
0
5
0
5
-
-10  
-15  
-20  
2001 2003 2005 2007 2009 2011 2013 2015 2017 2019  
Chart 18 Source: CPB  
2
3
4
IMF estimates  
25  
N. Arnold, A central fiscal stabilization capacity for the Euro area, IMF, March  
2018 or, for a simplified version, Eurozone convergence: Where do things stand  
today?, Louis Boisset, Conjoncture, BNP Paribas, April 2019  
2
Relating to the US economy: R.J. Gordon, Is US economic growth over? Faltering  
innovation confronts the six headwinds, NBER, August 2012