Japan’s recent success stems from decades-long efforts to restart the economy. It will be almost impossible for Beijing to restore this. Tyler Le, BI
Japan’s long-term economic shutdown is showing early signs of recovery, with rising wages, a booming stock market and the Bank of Japan raising interest rates.
China’s economy, on the other hand, faces similar challenges to Japan in the 1990s, particularly in the real estate sector, raising concerns about a possible balance sheet recession.
While Japan is making slow progress and can count on international support, China’s path may be rockier. Editor Linette Lopez spoke with Nomura economist Richard Koo.
This is a machine translation of an article from our US colleagues at Business Insider. It was automatically translated and checked by a real editor.
Japan’s long-comatose economy is finally showing signs of life.
After a catastrophic real estate implosion in the early 1990s, the country’s economy contracted over the next three decades. Households and businesses had to spend their money to pay down debt, which prevented them from investing or starting new businesses. Wages stagnated and the economy slipped from second largest in the world to fourth.
Eight years ago, policymakers tried to revive it by pushing interest rates negative. Progress was slow for a while. But Japan’s economy – the long-unconscious patient – recently began to wiggle its toes. Japan’s unions secured the biggest wage increase for workers in decades in March.
The Japanese stock market is booming; The Nikkei recently surpassed all-time highs set 34 years ago. Analysts at Goldman Sachs say there is more upside as corporate governance reforms take hold and a new era of sustained inflation begins. The Bank of Japan this month raised interest rates above zero for the first time since 2007, a sign of confidence in the country’s recovery.
In China, Japan’s return from this long misery is being watched with great concern
This revival has led to a mild celebration in the US, mostly limited to pats on the back on Wall Street and cries of “Great quarterly numbers, folks” as East Asia portfolios grow. But in China, Japan’s return from this long misery is being watched with great concern.
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Japan’s central bank raised interest rates for the first time in 17 years
China is facing a real estate market collapse
Like Japan in the 1990s, China is now facing a housing market collapse. The real estate market once accounted for 20 to 30 percent of the country’s gross domestic product. And all aspects of China’s economy – local governments, households, the banking system – rely on money from the real estate market to survive. After decades of overconstruction and speculation, a massive mountain of debt is imminent.
This is what we now recognize as a “balance sheet recession”: a term coined by Nomura economist Richard Koo in 1997 to describe Japan’s economic sluggishness as society deleveraged from the housing market collapse. Now, Koo says, Chinese academics and policymakers are heading to Japan to draw wisdom from the country’s experience.
“There is a big difference between Japan 30 years ago and China now. When we went into that balance sheet recession, no one knew what kind of disease we got,” Koo told me. “We were all lost for a long time.”
A closer look at the path Japan has taken to revive its economy darkens the picture
At first glance, the encouraging news from Tokyo should give Beijing hope. It shows that even in the most difficult economic circumstances, if there is a will, there is a way. But a closer look at the path Japan has taken to revive its economy darkens the picture.
Japan’s recent success comes from decades of effort by policymakers, careful negotiations with its trading partners and the strange conditions in which Japan’s economy has found itself. All of this will be almost impossible for Beijing to regain – at least without angering decision-makers from Brussels to Brasília.
The difficulty of working your way out of the crisis
The difficulty in emerging from a crisis like Japan’s is that the factors that contributed to the downturn reinforce each other. As property values collapsed, Japanese households saw their wealth dwindle, prompting them to save more and focus on paying off debt.
With fewer consumers going out and spending, companies cut prices to capture the few yen that were in circulation, causing nationwide deflation.