The most tantalising question in global economics is which nations are at risk of a Japan-like lost decade? China, of course, is the top candidate for this dreaded “Japanification” trajectory, whereby growth and inflation flatline year after year.
South Korea often comes to mind among economies at risk of a prolonged funk. So do nations as varied as the UK and India. But what if the place that most needs to internalise the lessons from Japan these past 25 years is, in fact, Japan?
Look no further than Tokyo’s continued obsession with keeping the yen weak to support exports and corporate profits. With the world watching, both Prime Minister Fumio Kishida and Bank of Japan (BOJ) governor Kazuo Ueda are welcoming the yen’s drop to 150 to the US dollar – and perhaps 160 next.
There are the perfunctory warnings that speculators shouldn’t test Tokyo and that Kishida’s team won’t tolerate “excessive” yen moves. Yet it’s not sizeable moves that Tokyo abhors, just those that boost the yen in ways deemed to hurt competitiveness.
There is a huge problem with this strategy: it’s the same one Tokyo has pursued since the mid- to-late 1990s. It is also at the heart of why Japan has never quite shaken off two-plus decades of negligible growth, stagnant wages and fallout from China surpassing it in gross domestic product terms.
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Can China learn lessons from Japan’s ‘lost 30 years’?
Can China learn lessons from Japan’s ‘lost 30 years’?
One can point to myriad reasons Japan Inc. refuses to raise its game. They include a change-averse political system, epic bureaucracy standing in the way, a sense of national pride that Tokyo does economics better than anyone and changing governments too often for big reforms to get implemented.
This last speed bump was challenged between 2012 and 2020 by Shinzo Abe’s premiership. The hope was that Japan’s longest-serving leader would spend those nearly eight years cutting red tape, modernising labour markets, encouraging innovation, empowering women and convincing multinational companies that Tokyo is a solid place to invest.
Mostly, Abe just did what the previous 11 governments dating back to the mid-1990s did: prod the BOJ into easing, to boost GDP via a weaker yen. Doing so eliminates the urgency for painful structural reforms.
Abe did manage to improve corporate governance somewhat. Moves to increase returns on equity explain why Warren Buffett is betting on Japanese assets and the Nikkei Stock Average is near 30-year highs.
Unfortunately, the benefits haven’t been shared with Japan’s workforce. The hope this past decade was that turbocharged quantitative easing would kick off a virtuous cycle. The weak yen would finally spur companies flush with profits to fatten pay cheques and spark a consumption boom.
Yet a dearth of reforms left decision-makers unwilling to take risks. This “trickle-down economics” with Japanese characteristics was the same ploy Tokyo used a decade earlier, and in the years before that. Delay tactic after delay tactic cost Japan decades it can never get back.
Now, roughly 12 years after China eclipsed Japan in GDP terms, President Xi Jinping’s economy is set to dominate Asian tech as Japan once did. Japan, meanwhile, trails its peers in producing “unicorn” tech start-ups. This is not a coincidence. It is the product of decades of treating the symptoms of malaise, not the underlying causes.
In Japan’s case, it is bureaucratic fiefdoms unwilling to embrace change. Generation after generation of politicians refused to upend this status quo. As leaders avoid disruption, CEOs lack confidence that the economy will be more vibrant 10 years down the road. The result is timid investment trends, sluggish income growth and a dearth of risk-taking.
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Boom, bust and borrow: Has China’s housing market tanked?
Boom, bust and borrow: Has China’s housing market tanked?
Today, as China grapples with a midlife economic crisis, it would be better if Japan found a way out of its own problems. If only Tokyo was able to impart a full case study for Beijing, London, New Delhi, Seoul and elsewhere struggling to avoid lost-decade ignominy.
China would benefit from such insights. Its economy being trapped in deflation is in no one’s interest. Watching Xi’s team slow-walk ending a property-sector crisis, one can’t help but notice parallels to Japan’s bad-loan nightmare of the 1990s and 2000s.
Demographics are reducing China’s odds of getting growth back above 5 per cent. The faster a population ages, the quicker deflation becomes ingrained. Retirees don’t spend like consumers in their 20s, 30s and 40s.
Another analogue is the self-inflicted nature of today’s problems. Japan acted glacially to repair bank balance sheets and rekindle innovation. Tokyo’s socio-economic decision that female and foreign talent need not be cultivated and harnessed is ageing terribly.
A customer looks at shoes displayed at a store in Tokyo on September 8. Japan’s Cabinet Office published the revised GDP for the period from April to June, showing 4.8 per cent annualised growth, down from the 6 per cent announced in August, owing to a decline in private consumption and weak capital investment by companies. Photo: EPA-EFE
In China’s case, the Xi era has been rough on the private sector. In late 2012, as Xi was assuming power, Beijing could have championed tech disruption, curbed the dominance of state-owned enterprises and welcomed greater press and internet freedom.
Xi has taken China in the other direction. The crackdown on tech is an unfortunate part of this. It’s the same with the extreme opacity that led to China Evergrande Group’s default. Fragile mainland developers, including Country Garden, are still making global headlines for all the wrong reasons.
Tokyo’s lessons for Beijing are clear: move boldly and transparently to fix the property sector, create broader social safety nets to encourage consumption over saving, and tackle inefficiencies to weed out “zombie” companies and sectors. Not that Japanese officials are acting accordingly, but Xi’s inner circle is convincing virtually no one it is on top of China’s fast-mounting troubles or that a Japan-like slump can be avoided.
