Fears over a recession are once again stalking markets, but many investors and analysts are more worried about a deeper, more structural shift: that the world economy is succumbing to a phenomenon dubbed “Japan- fiction”.
Japanification, or Japanisation, is the term economists use to describe the country’s nearly 30- year battle against deflation and anaemic growth, characterized by extraordinary but ineffective monetary stimulus propelling bond yields lower even as debt burdens balloon.
Analysts have long been concerned that Europe is succumbing to a similar malaise, but were hopeful that the US — with its better demographics, more dynamic economy, and stronger post-crisis recovery — would avoid that fate.
But with US inflation stubbornly low, the tax-cut stimulus fading and the Federal Reserve now having cut interest rates for the first time since the financial crisis, even America is starting to look a little Japanese. Throw in the debilitating effect of ongoing trade tensions and some fear that Japanification could go global.
“You can get addicted to low or negative rates,” said Lisa Sha- lett, a chief investment officer of Morgan Stanley Wealth Management in New York. “It’s very scary.
Japan still hasn’t gotten away from it…The world is in a very precarious spot.”
The primary symptom of spreading Japanification: the rise of negative-yielding debt, which has accelerated over the summer. There is now more than $16tn worth of bonds trading with sub-zero yields or more than 30 percent of the global total.
Japan is the biggest contributor to that pool, accounting for nearly half the total, according to Deutsche Bank. But the entire German and Dutch government bond markets now have negative yields. Even Ireland, Portugal and Spain — which just a few years ago were battling rising borrowing costs triggered by fears they might fall out of the eurozone — have seen big parts of their bond markets submerged below zero.
As a result, the US bond market is no longer the best house in a bad neighborhood: it is pretty much the only house still standing. US debt accounts for 95 percent of the world’s available investment-grade yield, according to Bank of America.
The US economy continues to expand at a decent pace, with strong consumption offsetting a weaker manufacturing sector. Even inflation has ticked up a little. But some economists fret that a manufacturing contraction will inevitably affect spending, so forecasts have been slashed for this year and next. Some even fear a recession may be looming.
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