Japan and China's Economic Reflections - Gleaning Insights from History

In 1987, when the headline "the coming U.S. _ Japan Crisis" was typical, several U.S. Congress members took sledgehammers to smash a Toshiba portable radio on the steps of the White House. This political stunt was a protest against Japan taking U.S. jobs, symbolising a period when the Japanese economy quickly became the world's second-largest. Challenging the U.S. for economic supremacy caused deep concern across the U.S. population. Fast forward to today, China's economy has now quickly become the second largest in the world, and it is also challenging the U.S. for economic supremacy, creating anxiety across the U.S. 

Today, while Japan remains the third-largest economy, its success suddenly stopped in the early '90s causing a spectacular collapse triggered by extreme real estate and stock market speculation buoyed by low-interest rates. The burst bubble is best symbolised by the Japanese stock market Nikkei 225 index, once near 40,000 in 1989, lingers below 35,000 today.  

Many are drawing parallels with the Chinese economy as it is beginning to show emerging concerns. While distinct differences exist between the two economies, there are also meaningful aspects that reveal underlying similarities worth exploring. This article reflects on some principal issues, compares similarities and differences, and discusses key learnings.  

Rapid Economic Growth: The Surge in Technology and Manufacturing

During what was known as the "economic miracle," from 1955 to 1990, Japan's GDP flourished, making it the world's second-largest economy. While initially considered inferior, its products gained a reputation during the '70s catapulting its global market share. Household brands like Sony, Toyota, and Honda symbolised Japan's technological prowess and manufacturing excellence. To give you some perspective, over a mere five years, Japan's share of global automotive production alone soared from 21% in 1975 to 29% in 1980 providing a stark example of the nation's supreme industrial acumen leading it to challenge U.S. economic dominance.

China, in comparison, has evolved into a global manufacturing powerhouse, producing everything from electronics to automobiles. Many international brands, such as Apple, Dell, and General Motors, manufacture products in China. Over the past three decades, China's GDP has expanded at an average rate of about 10% annually, reshaping China's domestic landscape and having profound implications on the global economic stage, challenging traditional Western economic supremacy.

Unprecedented Urbanisation: Demographic Transition

In the latter half of the 20th century, Japan's swift industrialisation transformed its demographic landscape, moving the population from rural areas to urban centres. Tokyo's population, for example, burgeoned from 8.1 million in 1960 to 11.4 million in 1980.

China's urbanisation is even more astonishing. Approximately two-thirds of the Chinese population now live in cities, dramatically increasing from one-third in the early 2000s. Cities like Shanghai and Shenzhen have morphed into extensive urban areas, reflecting an unparalleled rate of urbanisation.

Recognisable Similarities

Debt-Driven Property Bubble:

• Explanation: Both Japan and China experienced rapid increases in property values, driven by excessive borrowing and speculation.
• Relevance: This similarity highlights the risk of overreliance on property investment and the subsequent vulnerability to market corrections, a vital consideration for policymakers and investors.

Export-Focused Economy:

• Explanation: Both countries have relied heavily on exports, particularly in manufacturing, as a primary source of growth.
• Relevance: Dependence on external markets exposes economies to global fluctuations and trade policies, an essential aspect of understanding long-term sustainability.

Weak Consumer Demand Influenced by Debt Repayment:

• Explanation: High levels of personal and corporate debt have led to increased debt servicing, suppressing domestic consumption.
• Relevance: This dynamic underlines the importance of balancing growth with financial stability, especially in formulating monetary policy.

Aging Population:

• Explanation: Japan and China face demographic challenges with aging populations, leading to higher dependency ratios.
• Relevance: This trend has significant implications for social welfare systems, labour markets, and overall economic productivity, an essential consideration for long-term financial planning.

Growing Youth Unemployment:

• Explanation: Rising youth unemployment in both countries indicates structural issues within the labour market.
• Relevance: Addressing this challenge is vital for social stability and future economic growth, particularly in designing educational and vocational training programs.

Ineffectual Interest Cuts:

• Explanation: Japan and China have experienced limited success in stimulating consumption through interest rate cuts.
• Relevance: This emphasises the need for more nuanced fiscal and monetary policy tools, especially in managing economic downturns.

Minimal Inflation:

• Explanation: Despite aggressive monetary policies, both countries have struggled with low inflation.
• Relevance: This challenges central banks in managing monetary policy, an essential understanding for financial experts and policymakers.

Notable Differences

Property Prices Have Not Fully Collapsed (Yet?):

• Explanation: Unlike Japan, where the property bubble fully bursts, China's property market has yet to see a complete collapse.
• Relevance: This difference indicates the potential for ongoing risk in China's property sector, which is essential for investment and regulatory considerations.

The CCP Maintains Stronger Control Over the Economy:

• Explanation: China's government has a more direct role in managing its economy than Japan's market-driven approach.
• Relevance: This distinction affects everything from regulatory oversight to economic stability, providing critical insights into the potential response to financial challenges.

The benefit of Hindsight Regarding Japan's Experiences:

• Explanation: China has the advantage of learning from Japan's mistakes, particularly in managing asset bubbles and economic overheating.
• Relevance: This difference underscores the potential for more proactive and informed policy decisions, valuable for strategic economic planning.

Lessons to consider

• Avoid Overheating: Japan's asset bubble collapse is a vivid caution against excessive economic heating. China must exercise restraint and provide fiscal stimulus, especially in its real estate sector, where prices in cities like Beijing have surged over 300% since 2000.
• Embrace Good Governance: Japan's experiences highlight the need for wise regulation and financial stewardship, something China has begun implementing through actions like clamping down on shadow banking.
• Pursue Structural Reforms: To avoid stagnation like Japan's, China should continue transitioning from an export-led growth model to one driven by domestic consumption and innovation, as evidenced by initiatives such as "Made in China 2025."

Comparing Japan's economic journey in the '80s with China's current trajectory provides a multifaceted and enlightening study. While the current concerns may not be significant enough to indicate that China will follow the same path as Japan, the evolving trends are noteworthy and warrant a closer examination of these economic parallels.

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