Where is the Eurozone headed - are Japanese conditions on the way?

Investors pay little attention to Japan. From an economic perspective, however, it is worth taking a look at the country, which is currently undergoing an enormous process of fiscal and monetary policy change. This has become necessary because the past two decades have been characterized by low economic growth, escalating government debt and deflation.

The counterpart among the industrialized nations is probably the USA, with high economic growth and a reasonable inflation rate. But where is the euro zone currently heading?

This question has far-reaching consequences for investments. On the one hand, there is a risk that Japanese conditions will take hold in the euro zone. This means that low inflation would turn into deflation. Economic growth would remain on the edge of recession for many years and occasionally fall back there. Interest rates could fall a bit further. For the stock markets or for those who trade bitcoin Exness, this means a sideways or even slightly downward trend.

Conclusion: In the Japanese scenario, bonds would be clearly preferable to equities in .

The optimistic view is that the euro zone will catch up with the U.S. again by a good margin. This would equate to more economic growth and rising inflation.

Conclusion: In this environment, equities are the favorites and bonds tend to be the risk items.

What factors do you have to look out for to make sure you're in the right scenario?

There are three key influencing factors that are responsible for the current situation in Japan, in addition to demographic change. Prime Minister Abe is now trying to combat them.

    Probably the most important development is the too hesitant restructuring of bank balance sheets. Non-performing loans tended to be extended instead of written off. In this way, the true extent of the problems was concealed for a long time. The price paid for this was, among other things, significantly lower economic growth.
    In second place is the lack of will to reform on the part of a number of Japanese governments, which ensured that the labor market remained inflexible and companies relatively insulated from foreign influence.
    In third place comes the central bank's hesitant action in combating deflation.

Areas of action for the euro zone

If we apply these points to the eurozone, we find two important areas for policy action in the eurozone (rehabilitation of balance sheet banks and government reforms). The ECB is already working vigorously on the third area (combating deflation by the central bank). Last Thursday, it presented a comprehensive package of measures to combat deflationary tendencies.

Since 2010, the ECB has been giving eurozone governments the greatest possible room for maneuver to restructure budgets and initiate structural reforms. In press conferences and most recently at the central bank meeting in Jackson Hole, Mario Draghi vehemently urged these structural reforms. If they are not tackled with sufficient determination, his monetary policy will come to nothing.

Through stable framework conditions and business-friendly policies, governments are supposed to create the conditions for more investment and increasing demand for credit, for which the ECB provides the funds. Some countries are successful in this, such as Spain, Portugal and Ireland. In France and Italy, there are still significant deficits. That leaves the first point, the repair of bank balance sheets. Here, the ECB's stress test at the end of October should bring more clarity.

For it to be credible, many observers expect a larger number of banks in the euro zone to have capital gaps. If they were closed and more companies were also exonerated through bankruptcy, the way would be clear for more economic growth again The extremely low interest rates should nevertheless ensure that even (too) weak companies survive.