The term ‘Japanification’ is used in economist circles when describing an environment of slow economic growth, low inflation and low interest rates. 
It evokes the ‘lost decade’ after the collapse of the Japanese asset price bubble in 1991 – the aftermath of which is characterised by deflation and collapsed demand.
And it’s something that could be emerging in the west, according to David Jane (pictured), manager in Premier Miton Investors’ macro-thematic multi-asset team.
In reacting to the Covid-19 coronavirus, many western authorities have increasingly adopted the fiscal and monetary policy tools that their Japanese counterparts have wielded in promoting economic growth and combating deflationary forces that have hamstrung the economy.
Fears over a deflationary environment and the potential Japanification of the west have come to the fore more recently as inflation has remained stubbornly below target since the onset of the pandemic and lockdown conditions in the UK and elsewhere.
CPI in the UK
Source: ONS
One place that many feel government and central bank intervention has been felt, so far, is on bond yields.
Nevertheless, while extensive bond-buying programmes have played their part in driving yields down as big buyers with “unlimited fire power” make their presence felt, it could be more indicative of a longer-term trend that could lead to the Japanification of the west, according to Jane.
“Essentially, the US and Europe are becoming like Japan,” he explained.
“This argument rests on the view that central banks can only affect bond prices in the short term. In the longer-term, prices must clear at fair value.”
And there could be potential ramifications if governments try to manipulate the bond markets as they have tried to influence or fix exchange rates in the past.
“Where they attempt to fix them at levels divorced from economic fundamentals, it has often failed spectacularly,” he said.
“The same process could occur in bond markets: if the market thought bond prices were completely out of touch with reality, it would simply sell all of them to the central bank.”
The main impact that central banks might have had in recent months, said Jane, is as a provider of liquidity to offset short-term government bond issuance which might have swamped markets otherwise.
Huge levels of government debt could have a significant impact on the private sector and – when compounded by an ageing population and an increasingly monopolistic technology industry stifling innovation and growth – implications on generations to come.
Yet, the huge increase in the money supply of recent months has not led to rising inflation because money velocity has fallen in lockstep with the stagnating real economy, said Jane.
“In which case we need to consider whether this year’s decline in government bond yields is evidence that long-term economic growth and inflation expectations are falling rapidly,” Jane explained.
Yet, Japanification of the west remains a very real concern, the Premier Miton manager warned.
“The market may well be thinking that western economies are on a rapidly declining growth trajectory and even set for a long-term period of stagnation,” he said.
It remains uncertain, however, whether such an economic scenario will emerge, with just as many arguments in favour of a growth scenario as there are for an economic decline.
“The reality probably sits somewhere in between,” Jane continued.
“In the near term, the market can live with the idea that central banks will step in to provide liquidity and cap yields.
“At the same time, as has been the case throughout the period of QE, growth and inflation expectations have been falling.”
As such, investors should be prepared for a range of different scenarios.
“Our central case is one of lower for longer rates, inflation and recovering but slow growth, continuing on the current trajectory for some time,” he said.
“Were this to change and the major economies move onto a more inflationary path we would need to revise our view but there is little evidence of it so far.”
He finished: “Our view is that it isn’t quite Japanification just yet but nor are we about to see a major inflationary period.”