The recent economic challenges faced by the People’s Republic of China, the world’s second largest economy, have reignited debate around its future and its ability to replace the world’s largest. More specifically, its model of rapid growth has led to comparisons with a neighbouring economy that was once in its shoes: Japan. A recent article by Yifei Liu at the University of Edinburgh tackles exactly how apt this contrast is and whether any lessons can be drawn.
China has demonstrated an impressive growth rate and has long been predicted to overtake the United States. However, analysts seem less hopeful of this prospect, with some doubting this will ever happen. Forty years ago, films such as Blade Runner (1982) evoked similar fears that Japan would supplant the US as the economic superpower, until its stock bubble burst in 1989. Following this, share prices fell 60% in three years, with the Nikkei 225 index only recovering to former levels in February 2024.
Nevertheless, Liu points that the situation is more nuanced. While Japan suffered both a stock market and property crash at the end of the 1980s, China’s stock market is in a much healthier shape as its bubble already burst in 2015, implying that the current housing crisis will not have as far-reaching impacts as it did in Japan.
Another key difference lies in the countries’ relations to the United States. In the wake of the Second World War, the US became responsible for Japan’s national security, which gave it considerable leverage over its politics. Therefore, during its 30-year trade war with Japan, it was able to extract a series of concessions that prevented the latter from posing a real threat to its position. The most notable example of this was when the Reagan administration pressured Japan into signing the Plaza Accords, which devalued the dollar and increased the yen's value. This hamstrung Japan’s exports, which were the lifeblood of an already slowing economy. By contrast, the US has no such influence over Chinese policymaking.
Though the previous two points demonstrate the contrasts, there are two areas in which both countries are facing similar issues: government debt and an ageing population. While Japan’s ‘demographic dividend’ has long since passed, China is beginning to face acute labour shortages. According to the United Nation’s Population Fund, in 2024, China’s (1.2) fertility rate is even lower than Japan’s (1.3), and the population began shrinking in 2021. Furthermore, China’s government debt is only 45% of GDP (as of 2022), exhibiting similar levels to that of Japan’s in 1990. However, a slew of failed recovery measures has caused Japan’s debt-to-GDP ratio to grow to an eye-watering 263%, costing approximately a quarter of the national budget to service annually, without providing tangible outcomes. The recent $1.4tn stimulus package from the Chinese Communist Party signals a similar approach to maintaining growth via fiscal injections, but caution ought to be taken to ensure that underlying problems are resolved first.
Overall, Japan will serve as an important model for Chinese experts to study, aiming to harness the lessons embedded in its economic growth miracle. Although China’s current position is notably stronger than Japan’s was in the 1980s, it still contends with significant structural challenges. Sustaining the rapid growth rates seen over the past 30 years may be unrealistic, but striving for a soft landing would be wise.
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