Analysis: Ageing, indebted Japan holds lessons for others

Thu Jan 12, 2012 11:29am EST
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By Alan Wheatley, Global Economics Correspondent

LONDON (Reuters) - An asset price bubble pops, hitting bank balance sheets and tax revenues. As growth weakens and the economy flirts with deflation, the real burden of servicing debt increases.

Companies race to pay off debt, further dragging down growth. Government spending takes up the slack. Monetary policy is akin to pushing on a piece of string, so even zero interest rates have scant impact. Population decline compounds the vicious circle.

That is a rough summary of Japan's plight over the past 20 years. Worryingly, it may also turn out to be the template for other mature economies, especially in Europe.

"In terms of nominal GDP growth, things are playing out in a very similar way to how they did in Japan," said Albert Edwards, global strategist at French bank Societe Generale.

In a presentation for investors in London, Edwards said world markets, too, were following Japan's "ice age" lead.

Corporate dividend and earnings yields tracked bond yields lower in the 20-year global bull market for stocks that ended with the dot-com bust in 2000.

Since then, equity yields have climbed even as bond yields have continued to fall - the very same trend that began in Japan 10 years earlier as the country's property and share prices started to fall to earth.

"It's exactly what happened after their bubble burst in the 1990s," Edwards, a self-proclaimed "perma bear" on equities, said. "Prior to that there was a very close correlation in equity and bond yields."   Continued...