China’s economic woes are beginning to resemble Japan’s decades-long problems.
In the 1970s and 1980s, Japan’s economy rapidly developed into an economic powerhouse, just like China’s in the past few decades. The country’s technological advancement, export-led growth and centralized economy have even earned it the nickname “Inc. Japan”. Among Westerners.
During this period, Japan’s unemployment rate remained low and asset prices soared, especially in the 1980s, when the economy grew at an average annual rate of 3.9%, outpacing the US average of 3% for the decade. But eventually, overzealousness about Japan’s prospects led to a stock and real estate bubble that began to burst in the late 1980s. From late 1989 to mid-1992, Japanese stocks fell 60%.Over the next decade, land values continued to decline 80% From the peak in September 1990 to the end of 1999.
As a result, throughout the 1990s, Japan’s economy grew by only 1% per year, lagging behind other developed countries. Since then, Japan’s aging population and rising debt have led to persistent economic stagnation and prolonged deflation, forcing the Bank of Japan to keep interest rates near zero or negative for more than 25 years.
Now, as China’s economy shifts from a period of rapid export-led and debt-driven expansion to a more consumer-focused model, the country faces a familiar set of problems.
The ongoing real estate crisis, aging population, soaring youth unemployment and the burden of trillions of dollars in local government debt have created a crisis of confidence among Chinese consumers and foreign investors. China’s recent economic slowdown even led to a 0.3% year-on-year drop in inflation in July, the first deflation in China since the COVID-19 hit in 2020.
Some experts warn that a month’s worth of data doesn’t tell the story and that China’s long-term deflation is far from certain, but Richard Gu, chief economist at Nomura Research Institute, believes China is experiencing a balance sheet recession, which could lead to Similar to the “lost decade” that Japan experienced in the 1990s. When consumers and businesses choose to save money or pay down debt rather than invest or spend, it leads to weak economic growth and lower prices.
But ironically, with China facing the prospect of a slowing economy and persistent deflation, Japan may finally be shaking off its decades-long economic nightmare.
Is stagnation and deflation in Japan over?
Japan’s core inflation, which excludes fresh food, rose 3.1% in July after rising 3.3% in June. This marked the 16th straight month that core inflation has remained above the BOJ’s 2 percent target.
Japan’s Cabinet Office argued in its annual economic white paper that rising inflation could signal the end of an era of sluggish growth and deflation.
The government said that “price and wage increases in Japan have expanded since the spring of 2022. These changes indicate that the Japanese economy is reaching a turning point in its 25-year struggle against deflation.” A window of opportunity to exit deflation may be opening. “
The Japanese government has pointed out that Japanese companies are passing on higher production costs to consumers and argued that a tight labor market means wages are now more likely to rise than in past decades. The government added in the white paper that the recent rise in inflation in Japan is also starting to change consumer expectations of future price increases, which is crucial to preventing a return to deflation.
Investors recognized the problems facing China’s economy compared with Japan’s post-pandemic rebound, sending stock markets in the two countries moving in opposite directions. The CSI 300 index, which tracks the performance of the top 300 companies on the Shanghai and Shenzhen exchanges, has fallen 3% so far this year, while the Nikkei 225, which acts as a proxy for the Tokyo Stock Exchange, has surged 25% over the same period.
Warren Buffett’s Berkshire Hathaway also caused a stir this year when it decided to make a big move into Japan. Berkshire now owns more than 8% of each of Japan’s five largest conglomerates (ITOCHU, Mitsubishi, Mitsui, Sumitomo and Marubeni).
While investors have become increasingly optimistic about Japan’s prospects, and the government did strike an upbeat tone in its annual report on Tuesday, it has also been careful not to declare victory over deflation prematurely.
“We need to remove the sticky deflationary mentality that plagues households and businesses,” the report said. “We must be absolutely certain that we do not destroy the germs of overcoming deflation.”
The government is justified in being so cautious. Even with negative interest rates, Japan suffered decades of deflation and economic stagnation, causing Japanese companies to lose influence on the global stage. In 1995, when wealth Japan released its first “Fortune 500” list, measuring the world’s largest companies by revenue. A total of 149 Japanese companies were on the list, of which 6 companies entered the top 10. In 2022, only 49 Japanese companies will be on the list, and none of them will be in the top 10.