- Japan was the prime threat to the US’s economic dominance in the 1980s, but then things went wrong.
- Now, economists see worrying similarities between China in the 2020s and Japan in the 1990s.
- China faces high levels of debt, an ageing population, a hostile US, and even a possible financial crisis.
Name the Asian country. It has a rapidly expanding economy that has grown wealthy through exports. It has high levels of investment and debt, and a ballooning property market. Its growing economic power threatens to overtake that of the US.
It could be China in the 2020s, but that was exactly how Japan was seen in the 1980s, when the country was hailed as an economic miracle and the principal threat to US primacy. Its growth of 10% per year on average from the 1960s onward helped it become the world’s second-biggest economy by the 1980s, when its corporate icons like Toyota and Sony threatened to replace American counterparts like Ford and General Electric.
Then it all went wrong when its massive asset bubble popped. What followed was an end to the miracle and a full-blown financial crisis that rocked Japan in the early 1990s, leading to a "lost decade" where the economy flatlined. "Japanification" has since become a shorthand for the brutal mix of stagnation and deflation that has lasted to the present day.
These days, the similarities between China and Japan are starting to worry economists. Like Japan in the '90s, China is dealing with high levels of debt, an ageing population, a hostile US, and even the potential for a financial crisis. Recently, its own massive real-estate bubble is showing signs of bursting.
"The assumption that China's going to overtake the US as the world's biggest economy, I just don't think that's ever going to happen," Mike Riddell, a global fixed income portfolio manager at Allianz, told Insider.
A slowdown in the Chinese economy is the last thing the world needs in the 2020s, given that the country has accounted for around 30% of global growth in recent years, and could even lead to the "Japanification" of the world economy. Economists are worrying about China's own lost decade for four reasons.
Big debt problems and fears of a bubble bursting
Japan's real-estate bubble got so big in the 1980s that property prices in the country still haven't recovered from its popping. The chart below shows just how much corporate debt in Japan skyrocketed during the 1980s and early 1990s:
Fast forward to today, and China has been gorging on debt for years, powering rapid growth, particularly in the real-estate sector, which accounts for around 30% of the country's GDP.
The problem is that one of the biggest real-estate developers in China, Evergrande, is poised to default on $US300 ($AU404) billion of debt. That's the most debt of any company in the world, worth around 2% of China's GDP. And while Evergrande might be the most indebted Chinese real-estate firm, it's not the only one.
Evergrande's looming implosion comes against a backdrop of China's government clamping down on debt and trying to "rebalance" the economy towards consumption-driven growth.
Economists think China will slow as it shifts its economic model. The IMF expects the economy to be expanding at around 5% a year by 2025, compared to 10% a year in 2010. The Atlantic Council thinks growth could be as low as 3% a year by the middle of the decade. That looks like the beginning of a Japan in the '90s-style slowdown, but that's not all.
There are already "tremendous levels of panic and stress" in certain sectors of the Chinese financial system, Kevin Lai, Asia chief economist at Daiwa Capital Markets, told Insider. Bonds in the property sector have crashed, making it more difficult for some of China's biggest companies to borrow.
Wall Street analysts hope Beijing can keep a lid on any contagion, but Lai said the situation is far from predictable: "I think the market is way behind the reality … there will be many surprises."
A graying population
One of the major problems Japan's economy ran into in the 1990s was a rapidly ageing population. Simply put, a graying population means there are fewer workers, making economic growth harder. Rising pension costs and welfare spending also add to the pressure on public spending.
China's working age population peaked in 2015, after its one-child policy held down the national birthrate. Its huge population has allowed the economy to suck workers into the cities, powering its industrial boom. But China was increasingly urbanized at the turn of the 2020s and its supply of workers has slowed sharply.
China's demographic path is likely to resemble Japan's in the coming decades:
According to Allianz's Riddell, China's demographic "bomb has gone off." Riddell says the demographic problems also feed into worries about debts, with high levels of investment looking less appropriate for a slowing and ageing economy.
Tensions with the US
Japan's surge up the economic league tables startled the US establishment in the 1980s. Academics produced books with titles like "Japan As Number One" and "The Emerging Japanese Superstate." The Atlantic wrote about "containing Japan."
The US played tough with Japan then and it's playing even tougher with China now. President Donald Trump launched a full-blown trade war against the country in 2018, slapping tariffs on hundreds of billions of dollars of Chinese goods. President Joe Biden's administration is sticking to Trump's path.
Economists worry about a "decoupling" between the world's two biggest economies, ending the relationship that has been at the centre of global growth for a decade.
In a warning to the rest of the world, Japan may have just been ahead of the curve. A developing economy like Japan's before the 1980s and China's before the 2020s can only industrialize once, after which they'll have a lot of debt, a graying workforce, and low growth.
Once that happens, we'll need a better term than "Japanification" to describe it.