Why Japanification could cast a cloud over the SA economy

The world has experienced two significant end-of-an-era moments in the past couple of weeks. Both of these are loosely but significantly related: the introduction of average inflation targeting in the US and the surprise exit of the father of Abenomics, Minister Shinzo Abe, Japan’s prime minister. 

The connection between the two can be summed up in one word: Japanification. The term encapsulates both the almost 30-year, mostly unsuccessful, battle Japan has waged against secular economic stagnation and growing concerns that the rest of the developed world may be following in the country’s footsteps. 

The significance for South Africa, which saw its gross domestic product (GDP) plunge by 51% during the second quarter, is that a Japanification of the developed world will hurt the domestic economy’s prospects. The latest statistics released by Stats SA this week show that the country is in its fifth quarter of negative growth, with the manufacturing industry, trade, catering and accommodation industry, transport, storage and communication industry and the mining and quarrying industry contracting by between 68% and 75% during the three months. 

A revival in the South African economy will require a vast improvement in external as well as internal macroeconomic conditions, including a broadly supportive global economy and favourable domestic investment and expenditure dynamics. So far, the former doesn’t look encouraging, particularly if Europe and the US find themselves stuck in the same economic trap that Japan faced in the early 1990s and ever since. 

Important lessons have been learnt. Despite all efforts to stimulate the Japanese economy, the former economic dynamo made little progress in lifting interest rates out of negative territory, pushing inflation higher and triggering growth going again. In 2013, Abe introduced his three-pronged Abenomics strategy, which included substantial monetary policy easing aimed at achieving an inflation target of 2%, fiscal stimulus to jump-start economic growth and structural reform to underpin that growth in the medium to longer term. 

However, when Abe announced his resignation, the last recorded inflation rate was still at 0.3%, economic growth had averaged 0.41% from 1980 until 2020 and structural reform was generally perceived to be a non-starter.



The concern is that developed markets have introduced crisis policies that are remarkably similar to those presented by Abenomics and that these may prove as fruitless as they have been for Japan. While Covid-19 has made it difficult to predict what the new normal will look like, low inflation rates have predominated for years. They have necessitated unprecedented monetary policy stimulation and low interest rates for some time now. 

When exploring Japanification and what it means for growth inflation and financial markets, Capital Economics’ group chief economist, Neil Shearing, notes that the extent to which the world’s developed markets have become “Japanified” varies. He believes that Europe is furthest along, but the pressure on the Fed to reverse course and adopt a lower-for-longer interest rate policy puts it in the running too. 

“Look closely, and to a greater or lesser extent, much of the developed world seems to be turning at least a little Japanese,” he notes. 

Capital Group economist Anne Vandenabeele points out that crisis-era policies that have been introduced to avoid “Japanification” may bring it about if maintained for too long. Abenomics has shown that a prolonged period of low rates and low growth “raises the prospect of the US and European economies looking like Japan’s in some ways,” she says. 

Old Mutual Multi-Managers Investment Strategist Izak Odendaal notes that it is a fate that the Fed and the European Central Bank (and others) desperately want to avoid at all costs. 

“While Japanification means different things to different people, broadly speaking it refers to persistently low or negative inflation, near-zero or even negative interest rates, low private investment, low wage growth, even with low unemployment rates, and high public debt levels.” 

Fortunately, he doesn’t see Japanification as a medium-term worry for emerging markets like South Africa, but does acknowledge that as the global tectonic plates shift, so will ours. 

“Secular stagnation, Japanification, globalisation, demographics, migration, technological change – these are all longer-term forces that shape economies and markets.” 

Shearing asks the question: So what should we expect from here? He sees the Japanification of the developed economies as generally resulting in a macroenvironment characterised by mediocre growth, low inflation and very low interest rates for years. If Japan’s experience is anything to go by and policymakers don’t do things differently or better, it could be more like decades – an outcome that would be extremely harmful for South Africa, which is mostly dependent on a favourable global backdrop. 

Internally, there is also much work that needs to be done, including returning to fiscal sustainability through bold actions and changing expectations of sovereign debt ratings downgrades to expectations of stability and upgrades. 

“That should go a long way towards attracting the capital we need, given the current favourable global risk-free interest rate backdrop,” he notes. 

Globally and locally, infrastructure investing is seen as one crucial way out of the potential quagmire. However, initially positive signs in South Africa are looking gloomier after another round of Eskom load shedding and the recent news that the auction that will bring high-speed internet to South Africa has been postponed until March 2021. 

Says the Bureau for Economic Research: “As with the delay in energy reform, the postponement of the spectrum allocation, while a complicated exercise, is another example of the implementation paralysis that SA can ill-afford during these times of severe economic hardship.” 

The lack of progress in infrastructural development is not only happening in South Africa. Globally, the track record of, for instance, the US has also been disappointing. President Donald Trump’s grand promises regarding infrastructure investment programmes he intended to implement have not materialised. 

Given the inability of the fiscal and monetary policy measures instituted in Japan to sustainably improve the macroeconomic landscape, however, the economic spark that changes the fortunes of the developed world and South Africa may well lie in their ability to unlock the infrastructure growth dividend. BM/DM