Introduction

In the late 20th century, Japan fell into an economic quagmire that transformed its once-miraculous growth into a cautionary tale of long-term stagnation—a phenomenon now sometimes referred to as “The Lost Decade ”. Despite recent stock market successes (the Nikkei 225 surpassing levels not reached for three decades), Japan has still not recovered from the underlying economic stagnation  that continues to mire its potential. Several factors contribute to this ‘Japan Trap’; sluggish economic growth, deflation, an aging population and incredibly high debt, to name a few. Similarly, China’s is now struggling with several significant economic hurdles: a persistent property sector crisis, deflationary pressures, a diminishing population, and escalating trade disputes with Western nations . This has led some analysts to wonder if China is headed for a ‘Lost Decade’ of its own . What are the key factors still gatekeeping Japan’s prosperity? What are the socioeconomic similarities between Japan and China? Despite hardships is there any hope to be had amidst gloomy economic forecasting for China?

Japan’s Socioeconomic Woes: What is ‘The Japan Trap’?

Before assessing the parallels between Japan and China it’s important to briefly outline what the contributing elements of Japan’s economic stagnation are being referred to when we reference the ‘Japan Trap’.

In the late 1990s, Japan was unique among advanced economies, as it went from decades of unparallelled growth to experiencing near-zero levels of inflation, interest rates, and wage growth, with some measures, most notably interest rates, dipping below zero . The bubble burst on Japanese stock market and its real estate sector, sending the country into a spiralling debt crisis and a new deflationary paradigm. Japan’s GDP growth averaged only 0.5% per year between 1991 and 2010. What followed next has been dubbed by some as “chronic deflation”. The Consumer Price Index (CPI), excluding fresh food, first registered negative values around 1995 and has predominantly stayed in negative territory since 1998, except during the pre-global financial crisis commodity price spike. The GDP deflator shows a sharper decline from the mid-1990s onward . When examining price trends in the G3 economies, it shows that Japan has consistently experienced weaker price increases compared to the United States and the euro area, even prior to its prolonged deflationary period. Historically, Japan’s headline inflation has typically been two to three percentage points lower than that observed in the other two economies. A detailed breakdown of inflation by goods and services reinforces this trend. Additionally, other nominal indicators such as nominal unit labour costs (ULC) and nominal interest rates have also remained relatively subdued  in Japan compared to the United States and the euro area.

Japan’s debt surpassed the 100-percent-of-GDP threshold in the late 1990s, driven by extensive stimulus packages and escalating healthcare and social security expenses due to an ageing population  (more than one in 10 people in Japan are now aged 80 or older). Today, Japan is still one of the world’s most indebted countries with a debt to GDP ratio well over 200%.

Despite its high debt and enduring demographical issues Japan has, after over two decades, “a once-in-a-lifetime historic opportunity to exit from deflation”, according to Prime Minister Fumio Kishida. Central bankers and government officials are now optimistic on Japan’s chances to become a “normal” economy once again . Despite this, the cost of these unenviable lost decades has been astronomical, and Japan still has a long way to go before it can claim to have a semblance of normalcy.

China’s Socioeconomic Woes: Similarities and Differences

For a powerhouse economy like China the effects of a similar period of economic inertia would likely be devastating on both international and domestic fronts. What are the parallels between a late 90’s Japan and a mid 20’s China? There are certainly some similarities that can be highlighted with China’s problems today.

While other central banks battle with an unexpectedly strong consumer and stubborn inflation, China could be teetering on the brink of a deflationary paradigm similar to a late 90’s Japan. China’s consumer prices in January experienced the steepest annual decline in 15 years, falling by 0.8% year-on-year and marking the fourth consecutive month of declines, according to official data.   Recently, China has implemented several measures to boost consumer spending, such as relaxing automobile financing regulations . Despite these incentives, consumers are hesitant to make significant purchases due to concerns about the faltering economy and a sluggish job market . Richard Koo, chief economist at the Nomura Research Institute and analyst who originally coined the term ‘balance sheet-recession’ to explain Japan’s growth spiral in the 1990s says that China is now entering one  as well. In March, the annual core inflation rate, which excludes volatile food and energy prices, slowed to 0.6%, down from 1.2% in February. Additionally, the Consumer Price Index (CPI) decreased by 1.0% month-on-month, a reversal from the 1% increase in February and a steeper decline than the 0.5% drop economists had anticipated . Caution from Chinese consumers doesn’t seem unwarranted either. Eswar Prasad, a professor of economics at Cornell University and former head of the IMF’s China division, stated, “A multitude of indicators are now flashing red, signalling a perilous period ahead for China’s economy and financial markets. ”

One such ‘flashing red’ indicator is China’s property market. Similar to Japan, which saw a massive 70% slash in land values throughout the 1990s China’s real estate market set new records for devaluation. In February, the price of second-hand homes in the nation’s most developed cities dropped by 6.3% compared to the same month in the previous year, marking the sharpest annual fall since official records began in 2011 . “The full resolution of a severe property downturn is usually costly and takes many years,” according to Goldman Sachs who approximate the cost of saving the sector to be more than 15 trillion yuan (US$2.1 trillion) . The economic superpower is also experiencing a demographic crisis similar to that of a late 90’s Japan. Official data indicates that in the last year, deaths in China surpassed births by two million. The country recorded 11 million deaths compared to 9 million births, a decrease from 9.6 million in 2022, leading to a population figure of 1.4 billion . “The rate of population decline is not merely rising; it has more than doubled compared to the previous year,” stated Wang Feng, a specialist in Chinese demographics at the University of California, Irvine. In 2022, China’s population decreased by 850,000, marking its first reduction since a man-made famine occurred 60 years ago .

In other ways, perhaps the comparison between Japan and China is a little reductive. One thing China has on its side that Japan didn’t is its incredibly robust manufacturing sector. The Chinese economy expanded at a higher rate than anticipated during the first quarter, according to recent data, driven by increased factory construction and robust exports. These measures were aimed at mitigating the impacts of a significant real estate downturn and tepid domestic consumption. In an effort to bolster economic growth, China, the world’s second-largest economy, has once again focused on substantial investments in its manufacturing sector. This includes a surge in new factory developments, which has significantly boosted global sales of solar panels, electric vehicles, and other Chinese exports . “The Chinese economy got off to a good start in the first quarter … laying a good foundation for achieving the goals for the whole year,”  stated Sheng Laiyun, a spokesperson for the National Bureau of Statistics, during a press conference in Beijing that accompanied the data release. Although he caveated that, “(the) external environment is becoming more complex, severe, and uncertain, and the foundation for economic stability… is not yet solid”.  Hardly encouraging…

The Consensus

Overall, the outlook admittedly looks quite grim – there is a palpable possibility that China could fall into the ‘Japan Trap’. Even with victories in GDP growth, odds are certainly stacked high – if the superpower can manage deflation this year and sustain economic growth it won’t stop the long-term structural pivot being daunting for policymakers. “For China to rebalance its economy successfully, consumption would need to rise by about ten percentage points of GDP ” according to Michael Pettis, Professor of Finance at Peking University. The question of whether China’s substantial measures to stabilize its economy will be sufficient to avoid a long-term stagnation remains open. The crux of China’s recovery now lies with its decision-makers and how they choose to act and react to changing data and wider economic conditions. With smart strategy and a pinch of luck, China may yet prove too big to fail.

Reference:

Japan’s Lost Decade — Policies for Economic Revival (imf.org)

Japan’s stock market is back after 34 years but the country is deeply changed

China Is Heading for a ‘Lost Decade’ If It Doesn’t Reform, Analyst Says (businessinsider.com)

Is Japan finally becoming a ‘normal’ economy? (ft.com)

https://www.bis.org/publ/bppdf/bispap70c.pdf 

japan: Japan’s debt mountain: How is it sustainable? – The Economic Times (indiatimes.com)

Japan population: One in 10 people now aged 80 or older – BBC News

Japan economic outlook | Deloitte Insights

China’s prices fall at fastest rate in 15 years as economy battles deflation (ft.com)

China Eases Car Loan Rules in New Bid to Boost Consumption – Bloomberg

China’s shoppers hesitate to spend big in face of deflation (ft.com)

Inventor of ‘Balance-Sheet Recession’ Says China Is Now in One – Bloomber

China’s weak CPI, factory-gate deflation point to more stimulus | Reuters

China’s Real-Estate Market Just Set a Record—but Not a Good One – WSJ

China property: Beijing needs US$2.1 trillion to revive sector as rescue plans have not been good enough, Goldman says | South China Morning Post (scmp.com)

China’s population decline accelerates as economy reaches low growth target (ft.com)

China hopes for ‘dragon babies’ as population decline gathers pace (ft.com)

China’s First Quarter Results Show Growth Propelled by Its Factories – The New York Times (nytimes.com)

China’s Q1 GDP grows 5.3% thanks to strong manufacturing | CNN Business

China’s economic growth hits 5.3% (ft.com)

Can China’s consumers save its economy? (economist.com)

Zachariah Walker

Content Writer at Finalto

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