Europe is not Japan

Posted by: Paul Donovan

26 Apr 2019
  • Investors do not like uncertainty. Investors like to try to use the parallels of history to guess what may happen next. At the moment, some investors are suggesting Europe may follow the economic path taken by 1990s Japan.
  • Using very basic data, this seems a good parallel. Japan's population was ageing. Europe's population is ageing. Japan had very low interest rates. Europe has very low interest rates. Japan's companies used bank finance. Europe's companies use bank finance. But Europe is not Japan, in several very important ways.
  • Weak small businesses were a big part of Japan's economic crisis. Changing economic structures meant that Japan's smaller companies lost customers. They did not have the skills to find new customers. Banks kept the companies going, but created zombie companies. People were employed in companies with no future. Bank lending to Japan's small companies barely grew, and then collapsed. Employment in small companies barely grew, and then collapsed.
  • In Europe smaller companies are doing well. Employment by small companies has risen. Bank lending is growing. The European labour market could not possibly this strong if small companies were in trouble. In the areas that matter, today's Europe is the reverse of 1990s Japan.

Explore more CIO Daily Updates