Is China becoming “Japanized”?

China is the world's second largest economic power, the country with the most exports, and the second largest by population, having been overtaken only recently by India. The Asian giant has not stopped growing in recent decades, with GDP growth reaching 14.2% in 2007 or 19.3% if we go back to 1970. The country did not even see a decline in growth in 2020, the year of the pandemic, when it grew by “only” 2.1%. However, the Chinese economy is no longer growing at the same rate as in prior decades: excluding the impact of the Covid-19 crisis (lower growth in 2020 and a rebound the following year), growth rates are closer to 6%, and the government has set its target for this year at 5%, the same as in 2023.

President Xi Jinping advocates more sustainable growth, although China will have to meet a number of challenges that have emerged recently and that may hinder that path, such as demographics, the real estate crisis, deflation or the slowdown in globalization.

In fact, several investment banks and research services published reports in 2023 that posed the question of whether China was entering a “Japanization” phase. Analysts use this term when a country registers very low, near zero growth that is persistently below potential; deflation, or very low price increases; very loose monetary policy, with interest rates that are negative or at 0%; and minimal productivity. Also, in this case, a negative impact is being caused by demographics, excessive debt and problems in the housing market. But does this mean that China will experience the same problems as Japan in the 1990s?

China's economy grew by 4.7% in the second quarter of 2024, below the expectations of the country's authorities. MAPFRE Economics highlights in its report “2024 Economic and industry outlook: second quarter perspectives,” that China's construction sector continues to show weak dynamics, with the number of new construction projects falling by 24% in offices and 25% in residential, and construction work in progress declining by 12% in the residential segment and 9% in the office segment. Home sales have fallen by 27% and there has been a sharp drop in the price of land sold, which declined by 61% through May. New construction starts were down more than 24.6% and developer finance was off by 24.9%.

Despite this scenario, which is particularly serious considering the sector's weight in GDP, the government has a formal growth target for the economy of about 5%, the same as in 2023. MAPFRE Economics and other research services anticipate a lower GDP growth of 4.6% in 2024 and 4.1% in 2025, a slowdown related to investment in the real estate sector and the possible loss of dynamism in exports due to tariffs enacted by the United States and Europe on automobiles and other sectors.

However, MAPFRE Economic Research stresses that the interconnection of Western economies with China is of such scale that changes are a long-term issue. Also, the government has made public its intention to continue supporting certain critical sectors in order to maintain high levels of economic growth.

Eduardo García, senior economist at MAPFRE Economics, notes that for years there has been talk of the Japanization of other economic regions. One example is the European Union (EU) before the pandemic, when low growth rates and below-target price increases occurred with very low interest rates. “In the end, if different economies make decisions that are similar to those of Japan, the results will end up being similar,” Garcia stresses.

In the specific case of China, this does not appear to be the case. Growth remains high, at around the 5% level expected by the government and in line with the path set by President Xi Jinping, who wants GDP growth to be more sustainable in the long term. In addition, the government has acted quickly to prevent as far as possible the collapse of the real estate sector, while also preventing what happened in Japan during that lost decade. In terms of prices, the country has already managed to leave deflation behind owing to the strength of consumption (and the base effect). Meanwhile, at the monetary policy level, the country still has room to lower rates, which stand at 3.45%.

Japan today

Japan took many years to recover from the so-called “lost decade.” Analysts believe it ended in 2004, when the country achieved 2% GDP growth after years of very slight gains. MAPFRE Economics anticipates 0.4% growth for this year and 1.1% for next year.

The Bank of Japan reversed its monetary policy in March with the first rate hike in 17 years. Following this move, the price of money in the country stood at 0.1%, and rose again to 0.25% at its July meeting. It has already hinted that it will continue to take steps towards monetary normalization. The central bank also decided to slash by nearly half its program of massive purchases of Treasury bonds.

In parallel with this change in monetary policy, Japan's main stock market index, the Nikkei 225, reached its highest level since 1987, prior to the stock market crash and the subsequent “lost decade.” As of mid-September, the index remains strong at around 36,000 points, still near the 38,000 level of a few months ago, despite the drop in early August. In what is already known as “black Monday,” the Japanese index recorded a 12.4% drop due to several factors, such as the possibility of a recession in the United States and the prospect that it might spread to the rest of the world.

The Japanese yen, meanwhile, has weakened against the dollar over the past three years compared to pre-pandemic levels. This appreciation has been particularly notable in recent months, while also coinciding with the stock market decline.

“The depreciation of the Japanese yen is determined by the Bank of Japan's rate hike: the agency needs to bring this fluctuation under control, because if you have a currency that gets so weak, you end up importing external inflation. The best example is the barrel of oil, which is traded in dollars. Moreover, as a central bank, it must try to align itself with the monetary policies of the rest of the world to make the currency competitive. That's the way it is for an economy as open as Japan's,” Garcia points out.