Remember the 1980s? Japan seemed unstoppable: wealthy and dynamic, able to produce better and cheaper products than the rest of the world, it became an export powerhouse and accumulated huge dollar surpluses. For more than a decade, Japan’s real GDP growth persistently surpassed that of the US. The Tokyo stock market set record after record. The hard-working Japanese were winning a large number of “western” jobs, and Japan’s large corporations relentlessly acquired companies in the US and Europe. The Japanese economy, having surpassed Germany in the mid-1970s, was the world’s second-largest and seemed on track to effortlessly overtake the US. In brief, Japan was a rising superpower, widely perceived as becoming the leader of the global economy.
Suddenly, in the 90’s, this spectacular rise came to a halt, and a prolonged economic stagnation sapped Japan’s optimistic expectations. Why? Because the stock market and real estate bubbles burst – one after the other – in 1990 and 1991. The result was huge asset deflation (an 80% collapse in asset prices), a troubled financial system, and a credit crunch. Adding to these woes, the sustained appreciation of the yen relative to the US dollar hampered recovery. Despite a massive fiscal expansion – the government spent more than $2 trillion on public works – and the nationalization of losses, the 1990s were known as “the lost decade”. While still an economic power, Japan did not become the global leader; rather, it started losing its regional economic leadership to China.
Today, the powerhouse in the making is China. It looks as invincible as Japan did in the ‘80s. Remarkably, it has surpassed Japan as the holder of the largest foreign exchange reserves in the world, and nine-out-of-every-10 tons of steel produced globally end up in its construction sites. As Asia’s economic engine, China is driving the region’s integration. With its massive population, low wages and abundant foreign direct investment, it has the potential to become the world’s largest consumer market. In 2010, the Chinese economy overtook Japan as the world’s second-largest economy. According to accepted forecasts, by 2025 the US will have been left behind. By 2050, China may even surpass the combined production of the western hemisphere.
The trillion dollar question now is: can China suffer the same fate as Japan? In other words, is China likely to undergo a prolonged recession or depression between now and 2020? The short answer is: no. Indeed, while present-day China is as dynamic as Japan was in the ‘80s, it is far less wealthy. Its economy is at an earlier stage of development, and that is a blessing: starting from a much lower base, it can absorb inefficiencies – and still achieve strong and sustainable growth over the medium term.
No doubt, the two economic systems are quite alike. There are three main similarities: first, in both countries, strategic state intervention and corporate long-term thinking helped lay the foundations for sustained economic growth, but the symbiotic ties between key economic bureaucracies and the corporations under their regulatory jurisdiction (e.g.:, banks and insurance companies) can hold up progress. Second, Japan and China rely on export-led growth and display a “dual economy”: an efficient and productive overseas-oriented sector that co-exists with highly subsidized and protected sectors, where firms – shielded from shareholders and market pressures – become progressively less transparent, accountable, and innovative. Third, both economies enjoy high saving and low consumption rates, which supply abundant capital in the form of bank loans. Indeed, in the 1980’s Japan’s investment spending was well above the historical averages, and nearly half of China’s economic growth in the current decade came from public (highways and dams) and private (projects) investments.
Still, China is different. Its ongoing economic dynamism seems sustainable in the longer term, because of four basic reasons. First, China has strong fundamentals: excellent demographics, a rising middle class, massive urbanization, and high savings. If coupled with the benefits of free trade, market reforms, and economic integration, these fundamentals will bring about higher salaries and an increased standard of living. Second, China is trying to avoid export-dependence and favors the expansion of domestic private consumption, a step that Japan was unable to achieve in the 1990s – when its “savings surplus” became an impediment to domestic demand. It should not be forgotten that Japan’s structural reliance on exports and trade surpluses was the result of government policy. Quite the opposite, Chinese policy makers are promoting local demand; they are supporting targeted policy actions such as auto sales, health care, and rural income, and actively considering structural reforms, such as plans to reduce precautionary savings – i.e. the savings needed to meet health, education, and retirement expenses – by modernizing their tax and financial systems and establishing social protection schemes. Third, Japan’s unprecedented rise was based largely on inflated property prices – e.g.:, in the late 1980’s, the Imperial Palace in Tokyo was worth more than all the land in California. In China – while there are signs of excessive bank loans and unproductive investments – bubbles, if any, are not on the scale of Japan in the 1980s, and the economy’s tremendous growth potential is likely to de-inflate them swiftly. Fourth, the political economy is different. In Japan, the Liberal Democratic Party and vested interest groups representing protected and inefficient sectors of the economy hampered the implementation of sound reforms; in other words, policy mismanagement aggravated the problems and prolonged the recovery process. In China – a country undergoing huge social changes, rising inequalities and massive migration to the cities – some analysts fear the possibility of recurrent widespread upheavals, but the Communist Party knows very well that its legitimacy rests on delivering consistent annual increases in prosperity.
Over the next decade, the possibility of a long stagnation seems unlikely in China. The country is more likely to strengthen its position as Asia’s strongest nation and as a major player in the world economy. Still, similarly to Japan, because of the unresolved economic and political issues mentioned above, China is unlikely to become the global leader.