Comparisons are regularly drawn between Japan and Europe, with the accompanying warning that, like Japan, the euro area risks a lost decade. The fact is that things are already a lot worse in Europe than anything that happened in Japan.

The debate over the future of the euro usually asserts that the prime driver of Japan’s problems was deflation and that Europe’s seemingly inexorable slide into its own lost decade is strongly linked to the same problem.

Implicit in all of this is that Europe has, until recently, been doing much better than Japan but if we are not careful we will be heading the same way they did. Cue a massive row between Germany plus the hard-money, fiscally austere countries and the feckless periphery.

It is possible to argue with most, if not all, of this. First, it’s been a lot longer than ten years: Japan’s problem of low growth and a gently falling price level is now well into its third decade.

Actually, the issue hasn’t been that big: Japanese real economic growth has averaged just under 1 per cent for the period, nothing to write home about but a far cry from the impression of a permanent recession. Whether or not 1 per cent growth is good enough depends on a number of things: for most European countries it will probably be a disaster: that kind of growth won’t make any dent in unemployment and will, sooner or later, lead to questions being raised, again, about debt sustainability.

For Japan, low growth hasn’t been as big a deal as we might think: partly because of a shrinking population, Japanese GDP per capita growth has actually been a little higher than raw GDP growth. Although falling population is only really just getting under way in Japan, it is already having a modest but significant impact on the data.

More importantly, perhaps, positive but low growth in Japan does not produce high unemployment and results in few political tensions. Nevertheless, after a couple of decades even the Japanese have had enough. Although not without controversy, the current government’s extraordinary policies to try and boost growth are clearly supported by a broad consensus.

Financial bubble

Around the time of the bursting of Japan’s great financial bubble (the early 1990s), its GDP per head was around 6 per cent higher than that of what is now the euro area. A decade later, at around the turn of the millennium, Europe had grown to be bigger than Japan: that’s when we started talking about Japan’s lost decade, a description supported by the numbers. In the current millennium, the euro area and Japan have grown at roughly the same rate. But that broad observation conceals an important nuance.

In 2007, as the global financial crisis was getting under way, Japan’s level of GDP per head was still behind the euro area’s. On current estimates it has, as we end 2014, just about caught up.

Something relatively dramatic has happened over the last half decade: Japanese per capita GDP growth has resumed; in Europe it is shrinking. That’s the level of GDP by the way. Japan has grown its GDP above it previous 2008 peak; Europe has not.

On the most recent trends, Japan is growing its GDP per head at levels approaching 2 per cent a year, a rate not seen for a very long time. Europe’s GDP per head is still falling.

Disturbing

Japan’s recent success can be partly ascribed to the dramatic policy shifts implemented over the past few years. But the way in which the euro area is falling backwards is very disturbing. It means that the zone has done much worse than merely turning Japanese.

We still hear analysts ask the question about whether or not Europe will also experience a lost decade: the simple fact is that we are about to start the eighth year of witnessing the level of GDP per head fail to regain the previous cyclical peak. In its most awful period, Japan never came close to being that bad. For some European countries this is already a worse experience than that witnessed during the great depression.

Eventually, low growth after two decades became a problem that Japan had to fix. Europe does not have the luxury of anything like that kind of timescale. The politics of low growth are about to assert themselves in ways that the Japanese never had to confront.