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'Japanification'

August 23, 2012

The same dark forces that Japan has been battling could continue to infect the developed world.

-Scott Mather, head of global portfolio management, PIMCO
-Dirk Jeschke, portfolio manager, PIMCO

  • The same dark forces that Japan has been battling could continue to infect the developed world.
  • During Japan's banking crisis deflationary expectations became embedded in the economy early on, preventing real short-term rates from remaining negative and thereby clogging monetary transmission. Although deflationary winds are a risk in the developed world, they have yet to become embedded in expectations.
  • One of the chief explanations for the outbreak of deflation in Japan was the difference in the structure of the labor market. In Japan, at the onset of the banking crisis nominal wages quickly began to fall. In contrast, in the current crisis, the response of most of the developed world's labor markets has been quite different. 

 

Ballooning fiscal deficits, record low interest rates, depressing economic growth, private sector deleveraging, uncoordinated and ineffective governmental responses and monetary authorities increasingly exhausted and reluctant to act. Over the past two decades, people would have associated this characterization with Japan. However, more recently, they are accurate descriptions of the status quo in many other developed countries, raising the question: is the developed world becoming "Japanified?"

 

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