SURPRISINGLY, Japan and the Eurozone have the same amount of public debt, more or less, representing roughly $11 trillion (As at the end of 2012). writes Luke Pearce of Brewin Dolphin. 

The United States, for comparison had approximately $16.7 trillion. Japan has however been in a ‘Lost Two Decades’ since 1991.

Japan's "Great Recession", in simple terms, originated from a collapse in land and stock prices, which caused Japanese firms to become insolvent. Japanese corporations opted to pay down their debts rather than borrow to invest and grow; a situation that bears similarities to some of Europe’s current woes.

Low rates of growth in Europe have disincentivised corporate spending and wage growth below inflation has left little spare money available for consumer spending.

Until the autumn of 2012 there seemed to be little light in the tunnel for Japan – that was until the election of Shinzo Abe as Japanese Prime Minister and the advent of Abenomics! In simplified terms Abenomics is designed to overcome decades of deflationary pressures through a massive fiscal onslaught. 

As of yet there has been no sign that Abenomics is actually working in Japan. The latest Japanese CPI report shows that deflation is actually worsening but with the Yen having depreciated over 30% relative to the Dollar, Japanese goods will start looking far more competitively priced which should in turn lead to greater exports and a corporate recovery. Should Abenomics prove successful the Japanese economy has significant room for recovery and growth and over the past six months the Nikkei 225 has risen over 50%. In addition the Japanese have ‘saved’ for the ‘Lost Two Decades’ and there is, potentially, a considerable amount of money still to enter the economy and the Japanese equity market.

Whilst too much time has already been ‘lost’ in Europe over the past few years it has not been two decades and the united desire to restore growth can not be understated. Equally the Eurozone economy is more than twice as large as the Japanese economy and it has significantly less debt/ GDP at 91% relative to 238% in Japan. Mario Draghi announced in July 2012 that the ECB would do ‘whatever it takes to preserve the Euro’. This is a clear sign of unity between Euro nations and has resulted in the FTSE Eurofirst 300 Index rising 24%. The ‘preservation’ of the Euro reduces unquantifiable but potentially significant risks associated with a break up, hence the ‘relief rally’ in the markets. 

There does still remain a marked disparity between the Eurozone countries and there is a key need for Eurozone leaders to find not only a common currency but a common goal. The outcome of this may well dictate how the Eurozone economy performs over the next decade. With recent data showing only benign growth within Europe and Spanish unemployment having recently exceeded 27% and its youth unemployment over 56% there is no room for complacency. 

Europe has not been in as deep a recession or one as long lasting as that in Japan, its economy is larger and it is starting to show political unity all of which are extremely favourable. Whilst I do not foresee a sudden improvement in either the Eurozone or the global economy I do feel that the situation and more importantly sentiment is improving and perhaps it is reassuring to know that Europe still has ‘Abenomics’ available if required!

Luke Pearce is a Chartered Member of the Chartered Institute for Securities & Investment and an Assistant Director in the Teesside office of Brewin Dolphin, and can be contacted on 01642 608855.

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