Japan’s long-comatose economy is finally showing proof of life.
After a catastrophic real-estate implosion in the early 1990s, the country’s economy spent the next three decades shrinking. Households and businesses had to spend their money paying off debt, which prevented them from investing or starting new ventures. Wages were stagnant. And the economy slid from the world’s second largest to its fourth. Animal spirits were neutered.
Eight years ago, policymakers tried to bring them back by taking interest rates into negative territory. For a while, it was slow going. But Japan’s economy — the long-unconscious patient — recently started to wiggle its toe. Japan’s labor unions in March scored the biggest wage increase for workers in decades. The country’s stock market is ripping; the Nikkei recently exceeded the all-time highs it set 34 years ago. Analysts at Goldman Sachs are telling clients there’s still more upside to be had as corporate-governance reforms and a new era of sustainable inflation take hold. The Bank of Japan this month hiked interest rates above zero for the first time since 2007, a sign of confidence in the country’s recovery.
This bounce back has led to some mild cheering in the US, mostly confined to Wall Street backslaps and calls of “great quarter, guys” as East Asia portfolios grow. But in China, the reemergence of Japan from this extended malaise is being watched with close concern.
Like Japan in the 1990s, China is now staring down a property-market collapse. Real estate once accounted for 20% to 30% of the country’s GDP, and all aspects of China’s economy — local governments, households, the banking system — depend on money from the property market to survive. After decades of overbuilding and speculation, this massive debt pile is coming due. This is what we now recognize as a “balance-sheet recession,” a term the Nomura economist Richard Koo coined in 1997 to describe Japan’s economic sluggishness as society paid down debt from its property-market collapse. Now, Koo says, Chinese academics and policymakers are flocking to Japan to glean some kind of wisdom from the country’s experience.
“I tell them there’s a big difference between Japan 30 years ago and China now. When we got into this balance-sheet recession, no one knew what kind of disease we contracted,” Koo told me. “We were all lost for a long time.”
At a glance, the encouraging news from Tokyo should give Beijing hope. It shows that where there is a will, in even the direst economic circumstances, there is a way. But a closer look at the road Japan took to revive its economy darkens the picture. Japan’s recent success stems from a decadeslong effort from policymakers, careful negotiations with its trading partners, and the strange conditions Japan’s economy found itself in along the way. All of this will be nearly impossible for Beijing to re-create — at least, not without pissing off policymakers from Brussels to Brasília.
What happened in Japan
The difficulty of digging out of a crisis like Japan’s is that the factors that contributed to the downturn are self-reinforcing. When real-estate values collapsed, Japanese households saw their wealth take a nosedive, which pushed them to save more and focus on paying down debt. With fewer consumers going out and spending, companies slashed prices to woo what few yen were going around, which led to economywide deflation. This has the perverse incentive of making saving seem more attractive: Why invest in something or buy something now when it may be cheaper in a year or two? Corporations had to stay innovative, pay down debt, and fight for consumer dollars all at once, but those tight margins meant there was little room for worker raises — further constraining what households had to spend. The whole economy seemed stuck in a trap.
Eventually, the Japanese government and the Bank of Japan ramped up their efforts to kick-start the economy. The bank cut interest rates into negative territory, effectively forcing people to pay money to keep cash in their savings. And Shinzo Abe, Japan’s former prime minister, launched a campaign of “Abenomics” that included massive stimulus packages designed to inspire business and household spending. After all this hard work, Japan is starting to show signs that better days are ahead. Koo says executive culture is shifting toward more of an appetite for debt — more risk — and that means more investment in new projects. He compared the C-suite’s caution to the skepticism Americans who lived through the Great Depression in the 1930s felt toward debt — a form of PTSD. But, slowly, things are changing.
“I think it’s a good sign,” Koo told me, “but Japanese are very cautious people, especially compared to the US.”
One reason animal spirits are stirring in Japan is that the yen has been getting crushed against other major currencies since 2022. As a country’s currency becomes cheaper, its exports become more attractive to the rest of the world — which helps explain why Japan’s exports hit a record in 2023 — and makes corporations that depend on exports look as if they have healthier balance sheets.
“This has made Japan attractive for foreign investors, and the stock market has done well,” Koo said. But a weaker yen reduces the purchasing power of those using it domestically.
“For average Japanese people living in Japan, this has not been great news at all,” he told me. “What’s being said outside Japan and how it feels inside are very different.”
Tokyo knows it’s not out of the woods yet, but economists largely agree that early this year was the time for Japan to strike — to pull itself out of negative interest rates, even if the economy is still finding its footing.
“Initially driven by cost-push factors, inflation is becoming demand-driven with the output gap closed and labor shortages intensifying,” researchers at the International Monetary Fund wrote in a recent report. The biggest danger, they said, is that inflation has eaten up what little growth the country has. Luckily, though, the rest of the global economy seems like it’s in shape to support the country by buying Japanese goods and mobbing the country with a record number of tourists. That all must hold if we’re to see Japan close the chapter on its economic fall from grace. And so, toward the end of Japan’s most arduous phase of debt repayment, as companies looked healthier and the stock market much cheaper thanks to the currency, the world stepped in with more cash. None of it was a pretty process, but restructuring never is.
If China tried to replicate the procedure, though, it would look even uglier.
How Beijing will handle it
I don’t need to tell you that China and Japan have very different social and political systems. But it’s important to recognize that China is entering its real-estate crisis under very different economic circumstances: GDP per capita is about $12,800, compared with $41,266 in Japan when its property bubble burst. There are some useful comparisons, however. When Japan entered its downturn, its relative economic size compared with the US was similar to China’s now. Both are confronting what it means to manage a debt-laden economy losing its dynamism while demographic changes result in a shrinking workforce. These are long-term, structural problems with solutions we’re just now coming to understand. But now — just as some hard-line Japanese believed back in the 1990s — Chinese policymakers think they’ll weather this because their economy has room to grow, can mobilize its domestic market, and will find plenty of trading partners even if its relationship with the US has soured.
When the Japanese economy crashed in 1990, it took the government years to come to the conclusion to enact the fiscal stimulus that economists now consider the first line of defense against a deflationary shock. Early efforts to stimulate were wishy-washy. For example, a generous fiscal package in 1995 was countered with austerity in 1996 and 1997, according to analysts from the Peterson Institute. It took years for policymakers to get their mix right.
“The Chinese are talking about it every day, they understand what kind of disease they contracted,” Koo said. “Whether that translates into a speedy, sufficient, and sustained stimulus, we haven’t got there yet.”
While it took Japan years to come around to the idea of stimulus, China may never get there. Xi Jinping has shown few signs he’s willing to rain money down on the country’s starved local governments or even on households to spur consumption. He doesn’t really believe in handing money to consumers to let them do whatever they want with it. Instead, Xi’s solution is to get China’s monumental manufacturing machine to make higher-value goods. This continues the state’s control over the economy since the state directs banks where to lend and, in Xi’s opinion, sets China up to have the kind of economy that would rival other world powers. So Beijing is going all in on building the hard goods of the future: electric vehicles, semiconductors, cellphones, computer screens. He wants Chinese companies to buy all those things from Chinese manufacturers as well, creating an ecosystem of technology that would dominate markets.
And Xi wants the rest of the world to buy these goods from that ecosystem. This is where trade conflict comes in. The first time China became a manufacturing juggernaut, in the early 2000s, the world embraced it. Policymakers thought that integrating China into the global economy would make it a more open society and that the wins for some US companies would outweigh the downsides for others. But we’ve found that wasn’t the case. Instead, the world was hit by what economists now call the “China shock,” which stripped the US of its manufacturing base and left whole communities without good jobs.
Given this experience, any whiff of a new China shock will almost certainly result in the world pushing back. Policymakers are unwilling to allow even more crucial productions and jobs to be shipped off and out, leaving angry voters and instability behind. Japan’s leaders mostly ignored nationalist hard-liners who were angry at the US in the 1990s and focused on having a good relationship with the US, as it needed the richest country in the world to buy its goods. China is taking a different tack: Even as Xi invites US leaders to China to talk about how open the country is, American brands are getting walloped, US offices have been raided by Chinese officials, and financial firms and consultancies are moving out of China. Not even the Chinese stock market’s veritable collapse over the past few months interests investors, with Goldman Sachs warning clients to stay away. There’s cheap, and then there’s dangerous.
Because of these adversarial circumstances, it’s unclear how much the world will be able to buy what China is selling at any price. This is one of Beijing’s biggest stumbling blocks. Tokyo was able to pull itself off the mat in part because when the yen fell, the world was OK with that. Japan, after shutting down nuclear plants, started importing energy, and there was less of a trade imbalance between it and the rest of the world. China’s balance of trade is still skewed toward exports, which means if the yuan falls, its goods get cheaper and can flood markets.
So I don’t want to imagine the screeching from Washington if there’s even a hint that Beijing is allowing the yuan to depreciate in order to sell us more stuff.
Even without a currency war with Beijing, the world is building defenses against another wave of Chinese goods. Brasília just launched an antidumping investigation into whether China is flooding Brazil with cheap goods. Turkey recently tightened regulations on EVs shipped from China. And China’s EV exports to the European Union started the year down almost 20% after regulators announced an investigation into Beijing’s financial support of the industry.
The most crucial difference between China’s balance-sheet recession and Japan’s may be emotional. Throughout Japan’s recovery, markets worked from a cooperative ideological mindset, believing free trade was good. As China begins its recovery, that cooperation has turned adversarial. Ultimately, that may mean the difference between China continuing its rise or staying stuck in a debt trap. In the end, technology may not save China if it doesn’t have the right friends to buy it all.
Linette Lopez is a senior correspondent at Business Insider.
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