BNPP AM: Structural reflections on the mid-year market outlook

Lessons to be learnt from the performance of Japan’s financial markets

There are many reasons for the disappointing performance of Japan’s equity markets over the last 20 years (1.7% annual total return vs 6.9% for the MSCI World ex-Japan index), and of its fixed-income markets too (2.0% since 2000 vs 5.6% for the Citigroup WorldBIG Non-JPY index). The spur for the initial poor performance was not the market bubble itself (while Japan’s was indeed quite large, other parts of the world have experienced their own bubbles), but the delayed reaction to it.

The Bank of Japan did not react aggressively enough to the crash and the country’s banks took years before they finally wrote down the value of the bad loans on their books. This slow and inadequate policy response has since been exacerbated by the demographic drag from a shrinking and ageing population.

The Federal Reserve learned from Japan’s errors and responded much more quickly to the 2007-08 Global Financial Crisis, with the ECB following rather later but still in a reasonably timely fashion. American commercial banks wrote off their loans early in the crisis and soon returned to providing credit to the economy. Europe was again tardy (and in Italy’s case it still hasn’t adequately dealt with its problems), but still the system is today well capitalised.

Read more here about the structural factors that can influence the pace and nature of economic recovery.