After decades of decline following a real estate crisis, Japan’s economy is finally showing signs of improvement. Businesses and consumers were burdened by debt, hindering investment and growth. Stagnant wages and a shrinking economy led to Japan losing its position as the world’s second-largest economy.
In an attempt to revive the economy, interest rates were lowered to negative levels eight years ago. While initial progress was slow, Japan’s economy is finally showing signs of life. Workers recently received their biggest wage increase in decades, and the stock market is booming – even surpassing its all-time highs. Experts predict continued growth as corporate practices improve and inflation stabilizes. Finally, the Bank of Japan raised interest rates for the first time in over a decade, demonstrating confidence in the recovery.
While the US financial sector is celebrating Japan’s economic recovery with a few pats on the back, China is viewing the situation with a wary eye. This contrasts the celebratory mood on Wall Street with China’s concern about Japan’s resurgence after a long period of economic weakness.
China’s situation mirrors Japan’s in the 1990s. Both faced a property bubble bursting. In China, real estate used to be a major economic driver, contributing significantly to GDP. Now, after years of excessive construction and risky investment, a huge debt burden threatens the entire economy – from local governments and households to banks. This resembles a “balance-sheet recession,” a term coined by economist Richard Koo to describe Japan’s post-bubble struggles. Seeing parallels, Chinese experts are now seeking insights from Japan’s experience in managing such a debt crisis.
Koo acknowledges some key differences between Japan’s situation and China’s. He highlights that when Japan went through its balance-sheet recession, no one understood the economic problem they were facing. This lack of knowledge led to a long period of confusion and struggle.
While Japan’s recovery offers a glimmer of hope for China, replicating it won’t be easy. Japan’s success involved years of dedicated policy efforts, complex negotiations with other countries, and some unique circumstances specific to their situation. China faces a tough challenge in replicating this path. Their approach might cause friction with other major economies if it involves policies other countries wouldn’t approve of.
Japan’s economic downturn became a vicious cycle. When real estate crashed, household wealth plummeted, making them save more and pay off debt. This drop in spending led to deflation, meaning prices kept falling. This made saving even more attractive, as people figured they could buy cheaper later. Businesses, facing tight margins, had to focus on innovation, debt repayment, and attracting scarce spending. This left them with no room for wage increases, further limiting consumer spending. The entire economy became trapped in a loop of low spending, low prices, and low wages.
Japan finally took aggressive action to revive its economy. The central bank slashed interest rates so low people actually lost money keeping cash saved. Additionally, former Prime Minister Abe launched “Abenomics,” a program with massive spending initiatives to boost consumer and business spending. These efforts seem to be paying off, with signs of improvement in the Japanese economy. Koo observed a shift in corporate culture, with executives becoming more comfortable taking on debt to invest in new projects. He compares this initial hesitation to the risk aversion Americans felt towards debt after the Great Depression – a kind of economic PTSD. However, things are slowly turning around.
Koo sees the change in corporate culture as a positive development. However, he acknowledges that Japanese are generally more risk-averse compared to their American counterparts.
Japan’s businesses are regaining some confidence, partly due to the weakening yen since 2022. A weaker yen makes Japanese exports cheaper for foreign buyers, which is why they hit a record high in 2023. This boost in exports also improves the financial health of export-reliant companies.
While the weak yen attracts foreign investors and boosts the stock market, Koo acknowledges a downside – it makes imported goods more expensive for Japanese consumers.
There’s a disconnect between how Japan’s recovery is perceived externally and how it feels for everyday citizens. While there’s positive news for investors, Koo highlights the negative impact of a weak yen on household purchasing power. In simpler terms, things might look good on paper for Japan’s economy, but for regular people living there, it hasn’t been easy.
Despite ongoing challenges, Japan recognized the need to take action. Economists generally agree that raising interest rates early in 2024, even with an economy still recovering, was the right move for them.
The IMF warns that initial inflation, caused by rising costs, might be morphing into demand-driven inflation as production struggles to meet demand and labor shortages worsen. This could threaten Japan’s fragile economic growth. Fortunately, a strong global economy provides some support through increased demand for Japanese exports and a potential surge in tourism. Continued global strength is crucial for Japan to finally overcome its long period of economic weakness.
China’s attempt to follow a similar path to recovery would likely be even more challenging.
While China and Japan have distinct political and social systems, their economic situations entering their respective real estate crises differ significantly. China’s GDP per capita is much lower than Japan’s was when its bubble burst. However, there are some parallels. Both nations entered their downturns with similar economic size compared to the US. Both face the challenge of managing a debt-heavy economy with declining dynamism and a shrinking workforce. These are complex, long-term issues with solutions we’re still figuring out. Despite the challenges, Chinese policymakers, similar to some Japanese leaders in the 1990s, believe they can ride out the storm due to potential for further growth, a large domestic market, and the ability to find trading partners even amidst strained US relations.
Japan’s economic crash in 1990 revealed a critical mistake. The government took years to implement the financial measures that economists now see as essential to fight deflation. Early attempts to boost the economy were inconsistent. For instance, a significant spending package in 1995 was followed by budget cuts in 1996 and 1997, according to the Peterson Institute. It took a long time for policymakers to find the right approach.
Koo stated that China is actively discussing the situation, unlike Japan’s initial confusion. However, he remains unsure if China will implement the necessary economic stimulus measures quickly, effectively, and for a long enough period.
Unlike Japan’s eventual adoption of stimulus, China’s leader, Xi Jinping, seems less inclined to directly boost the economy. He’s not keen on giving money to local governments or consumers to encourage spending. Instead, his strategy focuses on China’s manufacturing strength. He wants them to produce higher-valued goods like electric vehicles and semiconductors. This approach maintains state control over the economy, as the government directs lending and aims to establish China as a dominant technological power. They plan to achieve this by encouraging domestic companies to buy from other Chinese manufacturers, creating a self-sufficient technological ecosystem.
Xi Jinping’s plan extends beyond domestic production. He envisions China’s ecosystem of high-tech goods becoming the dominant supplier for the global market. This strategy, however, risks sparking trade conflicts. When China first emerged as a manufacturing giant in the early 2000s, the world welcomed it. The expectation was that integrating China would foster openness and benefit everyone. However, this optimism backfired. The “China shock” devastated US manufacturing, leaving many communities struggling without good jobs.
Xi Jinping’s push for a dominant Chinese tech ecosystem could trigger resistance from other countries. Past experiences with China’s rapid manufacturing growth make them wary of losing vital industries and jobs. Unlike Japan, which prioritized maintaining a good relationship with the US ,China’s approach is creating tension. Despite Xi’s claims of openness, US companies face challenges in China, and foreign investors are wary after the recent stock market crash. This raises concerns that China’s economic strategy might be more risky than simply cheap.
China’s hostile relationship with other countries creates a major obstacle. Unlike Japan, which benefitted from a weakening yen accepted by the global market, China faces a challenge. Japan’s shift away from nuclear power increased energy imports, reducing its trade surplus. In contrast, China’s export-heavy economy means a weaker yuan could lead to a flood of cheap goods, potentially sparking trade tensions.
The idea of China weakening its currency to make exports cheaper and undercut US companies is likely to cause major friction with the US government.
Even without a full-blown currency war, other countries are taking steps to protect themselves from a potential influx of cheap Chinese goods. Brazil is investigating if China is dumping products in their market. Turkey has made it harder to import Chinese electric vehicles. Similarly, the European Union is investigating China’s subsidies for their EV industry, leading to a drop in Chinese EV exports to Europe.
The key difference between China and Japan’s recoveries might lie in global sentiment. Japan’s path was paved by a belief in free trade and cooperation. Today, China’s situation is marked by tension and suspicion. This shift from cooperation to competition could determine China’s future. Technological advancements might not be enough for China’s success if they lack willing buyers on the global stage.
