Japan's economy, which has been in a coma for a long time, is finally beginning to show signs of life.
After a catastrophic real estate implosion in the early 1990s, the country's economy shrank for the next three decades. Households and businesses had to spend money on debt repayments, making it impossible to invest or start new businesses. Wages were stagnant. The economy has fallen from second to fourth place in the world. The animal spirits were castrated.
Eight years ago, policymakers tried to bring interest rates back by pushing them into negative territory. Progress slowed down for a while. However, Japan's economy, which had been unconscious for a long time, has recently started to make some slow movements. In March, Japan's labor unions achieved the biggest wage increase for workers in decades. This country's stock market has crashed. The Nikkei Stock Average recently surpassed its highest level recorded 34 years ago. Goldman Sachs analysts are telling clients there is still room for upside as a new era of corporate governance reform and sustainable inflation takes hold. The Bank of Japan raised interest rates above zero this month for the first time since 2007, a sign of confidence in Japan's economic recovery.
The recovery has led to some mild cheer in the U.S., but most of it has been limited to flak and “great quarter, guys” from Wall Street as the East Asia portfolio grows. But in China, Japan's recovery from this long period of stagnation is being watched closely.
Like Japan in the 1990s, China is currently facing a real estate market collapse. Real estate once accounted for 20% to 30% of the country's GDP, and every aspect of China's economy, including local governments, households, and the banking system, relies on funds from the real estate market to survive. After decades of overconstruction and speculation, this huge pile of debt is coming to an end. This is what we now know as a “balance sheet recession,” a term coined by Nomura economist Richard Khoo in 1997 to describe the period in which society paid off debts caused by the collapse of the real estate market. It expresses the slump in the Japanese economy due to the Chinese academics and policymakers are now flocking to Japan to glean some wisdom from Japan's experience, Koo said.
“I tell them there's a big difference between Japan 30 years ago and China today. When we get into this balance sheet recession, no one knows what disease we have. I didn’t know that,” Koo told me. “We've all been lost for a long time.”
At first glance, the encouraging news from Tokyo should give hope to the Chinese government. It shows that even in the worst of economic times, where there is a will, there is a way. But a closer look at Japan's path to economic recovery takes a dark turn. Japan's recent successes can be attributed to decades of hard work by policymakers, careful negotiations with trading partners, and the strange situation the Japanese economy found itself in along the way. All of this would be nearly impossible for Beijing to replicate – at least not without angering policymakers from Brussels to Brasilia.
what happened in japan
What makes it difficult to emerge from a crisis like Japan's is that the factors that contributed to the economic downturn are self-reinforcing. As real estate values plummeted, Japanese households saw their assets plummet and began increasing their savings and focusing on paying down debt. Consumers stopped going out and spending less, and companies lowered prices to attract just a few yen, leading to deflation throughout the economy. This has a perverse incentive to make saving look more attractive. Why invest in or buy something now when it might be cheaper in a year or two? Businesses have had to simultaneously fight to stay innovative, pay down debt, and capture consumer funds, but narrow profit margins have left little room for raises for employees and strained household spending. further restricted. The entire economy seemed trapped.
What people say outside of Japan and how people feel within Japan are very different.
Eventually, the Japanese government and Bank of Japan stepped up efforts to revitalize the economy. Banks lowered interest rates into negative territory, effectively forcing people to pay to keep their cash in reserve. And Japan's former prime minister, Shinzo Abe, launched an “Abenomics” campaign that included a massive economic stimulus package aimed at stimulating corporate and household spending. After such tremendous efforts, Japan is beginning to show signs of better days ahead. Mr Khoo said the culture of management is changing towards more debt, more risk, which means more investment in new projects. He compared executives' wariness to the skepticism Americans who lived through the Great Depression of the 1930s felt about debt (a type of PTSD). However, the situation is gradually changing.
“I think this is a good sign,” Koo told me. “But the Japanese are a very cautious people, especially compared to the United States.”
One of the reasons for the animal spirits in Japan is that the yen has been crushed against other major currencies since 2022. As a country's currency depreciates, its exports become more attractive to the rest of the world. This helps explain why Japan's exports are in crisis. 2023 will set a new record, and companies that rely on exports will appear to have healthier balance sheets.
“This makes Japan attractive to foreign investors, and the stock market is doing well,” Koo said. However, the weaker yen reduces the purchasing power of people who use yen domestically.
“For the average Japanese person living in Japan, this is not good news at all,” he told me. “What is said outside of Japan and how people feel within Japan are very different.”
Japan's government knows it is not out of the woods yet, but economists say early this year is the time for Japan to strike out from negative interest rates, even as the economy is still finding its footing. I largely agree with that.
“While initially driven by cost-push factors, inflation is becoming more demand-driven as the output gap narrows and labor shortages deepen,” International Monetary Fund researchers wrote in a recent report. “It has said. The biggest danger, they say, is that inflation eats away the country's meager growth. Fortunately, however, the rest of the world economy appears to be in a position to support Japan by buying Japanese products and attracting record numbers of tourists. All of these things must hold true for Japan to end its economic collapse. And towards the end of the most difficult phase of Japan's debt repayments, the world seemed to be supplying more cash as the currency made businesses healthier and the stock market looked much cheaper. I intervened. It hasn't been a clean process, but restructuring is never a clean process.
But if China tries to replicate this procedure, it will get even uglier.
How will the Chinese government respond?
It goes without saying that China and Japan have vastly different social and political systems. However, it is important to recognize that China is experiencing a real estate crisis under completely different economic conditions. Japan's GDP per capita was approximately $12,800, compared to $41,266 when the real estate bubble burst. However, there are some useful comparisons. When Japan entered a period of economic recession, its relative economic size compared to the United States was comparable to that of present-day China. Both are faced with what it means to manage a debt-laden economy that loses its dynamism as demographic shifts shrink the workforce. These are long-standing structural problems whose solutions we are now figuring out. But now, as some hardline Japanese believed in the 1990s, Chinese policymakers believe that China's economy has room to grow and that it can mobilize its domestic market, even if relations with China We believe that even if things worsen, we will be able to survive this situation because we can find many trading partners. The US has gotten worse.
When Japan's economy collapsed in 1990, it took the government years to reach the conclusion that it would launch fiscal stimulus, which economists now consider the first line of defense against a deflationary shock. Early efforts to inspire were hopeful. For example, according to analysts at the Peterson Institute, fiscal policy was generous in 1995, but austerity was reversed in 1996 and 1997. It took policymakers years to establish the right mix.
“Chinese people talk about this every day and understand what kind of disease they have contracted,” Koo said. “Whether that leads to rapid, sufficient and sustained stimulation is not there yet.”
Japan took years to come up with the idea of a stimulus package, and China may never get there. Xi Jinping has shown little intention of funneling money to the country's starving local governments and households to stimulate consumption. He doesn't really believe in giving consumers money and letting them do whatever they want with it. Instead, Mr. Xi's solution is to force China's monumental manufacturing machinery to produce more valuable products. This maintains state control of the economy, as the state dictates to banks where to lend, and, in Xi's opinion, puts China on par with other world powers. That's why the Chinese government is working hard to build the hard goods of the future, including electric cars, semiconductors, mobile phones, and computer screens. He wants Chinese companies to buy all these things from Chinese manufacturers and create an ecosystem of technologies that dominate the market.
Chinese people talk about it every day and understand what kind of disease they have contracted.
And Mr. Xi wants the rest of the world to buy these goods from that ecosystem. This is where trade tensions arise. When China first became a manufacturing giant in the early 2000s, the world embraced it. Policymakers believed that integrating China into the global economy would make it a more open society and that the benefits for some U.S. companies would outweigh the downsides for others. But it turns out that's not the case. Instead, the world suffered what economists now call the “China Shock,” which took manufacturing from the United States and left entire communities without good jobs.
Given this experience, any sign of another China shock will almost certainly result in a global backlash. Policymakers do not want to allow even more vital production and jobs to be lost, leaving angry voters and a volatile situation behind. Japan's leaders largely ignored nationalist hardliners who were angry with the United States in the 1990s and forged good relations with the United States because they needed the world's richest country to buy their products. I focused on that. China is taking a different tack. Even as President Xi Jinping invites US leaders to China and talks about how open the country is, the US brand is in turmoil and US offices are raided by Chinese officials. As a result, financial companies and consulting firms are withdrawing from China. Even the true collapse of China's stock market over the past few months has not intrigued investors, with Goldman Sachs warning clients to stay away. Some are cheap, some are dangerous.
This hostile situation makes it unclear how much the world will be able to buy what China is selling. This is one of Beijing's biggest obstacles. Tokyo was able to climb off the mat in part because the world tolerated it when the yen fell. After shutting down its nuclear power plants, Japan began importing energy, and its trade imbalance with the rest of the world decreased. China's trade balance remains skewed toward exports, and a weaker yuan could make products cheaper and flood the market.
So it's hard to imagine a shriek coming from Washington at the slightest hint that the Chinese government is allowing the yuan to weaken in order to sell more stuff.
Even without a currency war with China, the world is building defenses against a new wave of Chinese products. Brasilia has just launched an anti-dumping investigation into whether China is flooding Brazil with cheap goods. Turkey recently tightened regulations on EVs shipped from China. Additionally, China's EV exports to the European Union (EU) have fallen by almost 20% since the start of the year after regulators announced an investigation into the Chinese government's financial support for the EV industry.
The most crucial difference between China's balance sheet recession and Japan's may be emotional. Throughout Japan's recovery, markets believed that free trade was good and functioned based on a cooperative ideological mindset. As China began to rebuild, that partnership turned hostile. Ultimately, it could mean the difference between China continuing to rise or remaining stuck in a debt trap. After all, technology may not save China unless it has the right friends to buy it all.
Lynette Lopez I'm a senior correspondent for Business Insider.
