The economy is having a rough time. But comparisons with Japan are unfair — to Japan 

THE world is finally awakening to challenges that have been building in China for years. That means it’s open season among the commentariat on the country and its economy. Languishing growth has produced a slew of unflattering comparisons both with the US, and with the China that was — the juggernaut that attracted as much envy as unease. 

But as China slips into deflation, one word is popping up more and more to describe the gloomy atmospherics: Japanification. The surface similarities with Japan of the early 1990s are there: A rickety real estate sector, a fast-ageing population, and trade tensions with the US in a scrap for global dominance. 

For a generation, you could take one big idea about global economies to fashionable salons and not be laughed out of the room: China’s ascent was inevitable, and the product of the country’s unique qualities. Japan’s mismanagement of problems made it a cautionary tale to be avoided. There’s now a pile-on the other way. It’s too easy to assert that China is now headed down the same path as prices retreat and demand wilts. 

Not only is China’s situation very different to that of Japan’s economic bubble, if the economy truly is at a tipping point (and that’s a big “if ”), becoming like Japan might be the best possible outcome China could hope for. Japanification was never the nightmare scenario over-excited Asia watchers thought it was. 

The word is often used as a pejorative, a shorthand for low growth, inflation and interest rates. But as the Nobel laureate Paul Krugman notes: “Japan, rather than being a cautionary tale, is a kind of role model.” It’s obvious in retrospect that there were demographic changes that Tokyo could never address: The post-war surge in working age population simply could not continue, regardless of what birthrate or immigration policies the country pursued. 

But Japan has, to date, managed a transition away from explosive growth with little social upheaval. Even at its worst, unemployment never rose above 6%; the suicide rate has dropped 40% in the last two decades; homelessness has been cut by 80%; there’s no drug problem that stalks the streets of so many Western cities. The pork-barrel spending that was criticised by Western economists in the 1990s means the country’s infrastructure is sparkling. Crime is low; healthcare universal. 

Regardless of what policies it implements going forward, China would do well to emulate this soft landing. While post-bubble Japan was chastised for not dealing forthrightly enough with problems in the financial and property sectors, public policy did evolve and was, at times, revolutionary. The Bank of Japan (BoJ) was the pioneer of zero interest rates and quantitative easing (QE). 

Arguably, the BoJ didn’t get sufficiently aggressive until 2013, but when Ben Bernanke was looking to reflate the American economy in late 2008, someone had already been there. Bernanke had studied Japan’s experience with real-estate fiascos and made several speeches on the subject as an academic and Federal Reserve (Fed) governor. Even after 2008, QE was a bad word among some of the economies that felt they had things figured out, principally Australia and New Zealand. But when Covid struck, they were eager subscribers. 

One key difference is public accountability. When public dissatisfaction sufficiently mounted in post-bubble Japan, voters could dump the long-ruling Liberal Democratic Party (LDP) from power, as they did briefly in 1993 and again in 2009 (the Opposition Democratic Party of Japan, now obsolete, was similarly punished in elections in 2012 that restored the LDP to power.) Much is made of the party’s post-war dominance of the political system, but it needs to stay keenly attuned to the public mood — witness current Prime Minister Fumio Kishida’s current struggles with an unpopular identification card scheme. Can one-party, election-free China find the same pressure valves? 

One major challenge facing both countries is demographics. Japan’s low birthrate and greying population have long been on policymakers’ minds. When it was fashionable to deride Japan, subpar fertility was something to be wielded against the country, a sign that a kind of permanent twilight was settling over what’s still one of the world’s biggest economies. 

What doesn’t get nearly enough attention is that Japan isn’t doing too badly, relative to the neighbourhood and advanced economies: The total fertility rate (TFR), the number of children a woman can expect to bear in her lifetime, fell to 1.26 last year. South Korea has it far worse at 0.78, as does Singapore, where the TFR dropped to 1.05. Japan’s is closer to Spain and Italy than to its neighbours. In China, the rate plummeted to 1.09 last year from 1.30 in 2020, according to a study by a government agency reported by Reuters and the Wall Street Journal. Japan almost looks hale by comparison. 

Hard as it is to believe now, as recently as the mid-1990s Japan was the US’s great economic bogeyman. Books like “The Coming War with Japan” or “Zaibatsu America” spoke of how Tokyo was set to take control of the Western sphere of influence. For long-time sceptics of China’s model, the temptation to think this is a repeat and engage in schadenfreude is immense. How many lectures on the superiority of China’s approach did Western officials and executives visiting Beijing have to endure? 

Veering very far in the opposite direction should also be avoided. Japan, with its security dependent on the US, was never going to rule the world, no matter how many times you watched Rising Sun. Still, tales of its demise were over-exag- gerated. Just like Japan, China is likely neither headed for global dominance nor set for collapse. If there’s a lesson to take away from this, perhaps it’s how some observers adopt a black-or-white view of countries that have many shades of grey. — Bloomberg

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners. 

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• This article first appeared in The Malaysian Reserve weekly print edition