Extended periods of deflation, economic stagnation, a declining real estate market, financial pressure, and stress affecting households, businesses, and the state indicate credible parallels between contemporary China and Japan during the 1990s.
China risks becoming an aging and heavily indebted nation before it attains wealth.
China’s aging population
The Japanese population began to decline in 2008, two decades after the onset of its severe economic crisis, termed the “Lost Decade,” which was effectively two lost decades. In contrast, China’s population started a notable decline in 2022. A critical issue for China is that the average income per capita was USD 12,800, while Japan’s was USD 29,470 at the bubble’s collapse in 1991. Japanese households then had more financial flexibility compared to Chinese households today. Although both countries share a similar low birth rate of around 6.8 (per 1,000 inhabitants), indicating a significant decline, this rate has plummeted faster in China (where those over 65 now make up 15 percent of the population) than in Japan.
Matthew Ketchum of Akiya & Inaka, a company aimed at assisting non-Japanese residents in finding empty homes in rural areas, shows a client a property in Kanagawa Prefecture in January 2021. (Image from the Japan Times)
The similarities between the downturns in the real estate markets of the two nations are striking, especially since real estate is the most vital economic sector in China, where its slowdown profoundly hinders Chinese growth. Just like the Japanese real estate crash of the 1990s, structural issues also plague the Chinese property sector, which faces a collapse in demand rather than a cyclical downturn or high-interest rates. The primary vulnerability is the drop in land sales transactions that once generated substantial revenue for governments and local provinces, which are now deprived of this income.
Public debt is primarily held by citizens in both nations, with China’s debt (including household, business, and local government debts, excluding the financial sector) around 300 percent of GDP, comparable to Japan’s debt levels in the 1990s.
Tokyo, Japan, in 1990
On the international front, the strategic competition between China and the United States is significantly more intricate than that experienced by Japan and the U.S. three decades ago. Indeed, one cannot equate Japan’s massive surpluses at that time, which were addressed by the Plaza Accord in 1985, with the U.S.-China tariff war initiated in 2018, which has been worsened by U.S. technological decoupling — even a boycott — posing major challenges for China. Additionally, there has been a notable trend toward de-globalization affecting China since 2008, while Japan reaped the benefits of the globalization surge in the 1990s. In this context, the Russo-Ukrainian war has significantly accelerated the reshaping of production chains away from China.
Youth Congress members in Kolkata protest the deaths of 20 Indian Army soldiers in Ladakh’s Galwan Valley at the hands of Chinese troops in 2020. Activists destroyed Chinese products displayed on a banner that read ‘Boycott Made In China.’
Finally, while Japan had considerable flexibility in its monetary policy, with its key interest rate exceeding 8 percent in 1991, allowing it to lower rates to about 2 percent three years later to cushion the impact of the real estate crash. Japan was also the first nation to adopt a zero-interest rate policy. China’s present interest rates, around 3 percent, limit the potential positive effects of any monetary stimulus.
Thus, China seems to be on a trajectory toward “Japanification,” facing — as rating agencies might describe — a negative outlook (in comparison to Japan’s past) due to a significantly worsened internal and external environment compared to what Japan dealt with in the 1990s.
For further insights from the author, Michel Santi, and his exclusive opinion pieces like this one, visit his website here: michelsanti.fr
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