Deja vu in East Asia?

The slowdown of the Chinese economy in recent years together with significant demographic shifts has generated speculations about whether China is on a downward trajectory similar to Japan’s at the turn of the century. In Japan, rapid economic growth was followed by stagnation of the economy accompanied by depopulation and the rising share of old people in the total population.

During the Second World War, Japan’s economy and national morale were plummeted by its doomed alliance with Germany. After the war, the US, which earlier hit two Japanese cities with nuclear bombs, undertook a thorough overhaul of Japan’s economic and political institutions – much like what it did for Western Europe.

The 1951 and 1954 security treaties with the US allowed Japan to focus exclusively on rebuilding its war-ravaged economy. Being well deficient in primary resources, the country set out to expand its manufacturing sector. What followed was an economic miracle, which made Japan a great power without having to develop nuclear capability, unlike most other 20th-century powers of similar stature.

During the 1960s, the Japanese economy registered more than 10 per cent average annual growth. However, in the following two decades, the growth moderated to slightly above 4.0 per cent each. In the 1990s, Japan entered a protracted economic stagnation phase from which it hasn’t yet recovered. The problem started with the sharp escalation of prices in an overheated real estate market. To cool down the realty sector, the Bank of Japan (BoJ), the country’s central bank, raised interest rates. The remedy worked but at the expense of putting the brakes on overall economic growth.

Reversing its policy, the BoJ cut interest rates. But now Japan faced a liquidity trap – a situation where people neither spend nor invest their savings because they expect prices to fall further. Throughout much of the 1990s, the BoJ kept the interest rate low but failed to resuscitate the economy. The growth rate went down to 1.5 per cent. The 1990s are called Japan’s Lost Decade. The economic growth momentum lost has not yet been regained.

The economic decline of Japan was accompanied by the rise of another East Asian nation: China. While in the 1970s Japan’s economic miracle was losing its steam, that of China was shaping up on the back of market-oriented reforms orchestrated by Deng Xiaoping, who had replaced Mao Zedong as the nation’s paramount leader.

In the 1990s, China started becoming more attractive than Japan as the investment destination for multinational enterprises (MNEs) on account of three factors: lower cost of production, a much bigger domestic market, and the continuing opening-up. In the following two decades, China further cemented its position to replace Japan as Asia’s largest economy and finally displaced the US from the position of the globe’s top exporting nation.

Like many other advanced nations, Japan experienced a major demographic shift in the form of an ageing and declining population. Having peaked at 128 million in 2010, the Japanese population began to fall, contracting to 124.5 million by the end of 2023. In the meantime, Japan has become demographically the oldest country in the world. Currently, old people (65 years and above) account for 29 per cent of the total population and are projected to constitute 41 per cent by the end of the century. Japan’s population problem has been exacerbated by the government’s refusal to institute a soft immigration policy – a reflection of the essentially exclusive character of East Asian culture.

Present-day China shares close similarities with Japan at the turn of the century. These include rising costs of production on the back of increasing wages and a slowing economy. Having registered close to 10 per cent growth for three decades back-to-back (1980-2009), the Chinese economy moderated to 7.7 per cent expansion between 2010 and 2019. Since 2020, the average growth rate has fallen to 4.7 per cent.

Like Japan, China is facing a real estate crisis. The realty sector makes up close to a quarter of the Chinese economy. Owning a decent house has not only been a safe investment in China but is a matter of social prestige as well. In recent years, the country has seen the collapse of two real-estate giants: Country Garden, the nation’s largest construction group, and Evergrande. The overall housing market is in a downturn, dragging down economic growth.

The demographic shift is another common factor between the two East Asian economic giants. Having peaked at 1,412.4 million in 2021, the Chinese population went down in the following two years, making China lose the most populated country status to India. The share of the old in total population is also on the rise, as in the case of Japan, reaching 14.2 per cent in 2022 and is projected to climb to 25 per cent by 2050.

Such similarities, as mentioned in the preceding paragraphs, lend credence to the view that China is about to enter, if it hasn’t already done, a prolonged period of economic stagnation, as Japan did in the 1990s. Be that as it may, one also needs to be mindful of the crucial differences between the two countries.

The first obvious difference is the size. China is a gigantic country, with an area of 9.6 million square kilometres. Compared with that the size of Japan is a diminutive 0.38 million sq km. The difference in population size is no less huge. China’s much bigger area and population provide it at least two advantages over Japan: One, China is the second largest consumer market in the world and has the globe’s largest middle class comprising about half a billion people. Under such credentials, China provides greater opportunities to businesses – both domestic and foreign – than Japan ever did. Two, China is far more abundant in natural resources, which can ensure a reliable supply of raw materials for industrial expansion.

China also has a ‘more complete’ manufacturing infrastructure than Japan ever had. It currently accounts for 30 per cent of global manufacturing, while Japan’s highest-ever share was 18 per cent in 2000.

The next vital difference between the two countries is in terms of development level. Japan became an advanced economy before it stagnated. Per capita income in 1990, when economic stagnation started, was as high as $26,000. By contrast, China remains a developing economy, where per capita income is less than $13,000. This means that China, unlike Japan, still has a lot of room for development.

The final difference between the two countries pertains to relations with the US. Since the end of the Second World War, Tokyo and Washington have remained strategic allies. In the economic sphere, they have been at most healthy competitors, never adversaries. By contrast, Beijing and Washinton are strategic rivals, as borne out by the ongoing tech and trade wars between the two world powers in which China has mostly been at the receiving end.

The rivalry with the US may affect China’s long-term growth. At the same time, it gives Beijing greater strategic autonomy than Tokyo. For example, Beijing isn’t constrained to sanction, or otherwise downgrade relations with, Moscow or Tehran just because it’s Washington’s policy. This gives China more opportunities to expand its economic muscles.

Given several similarities and differences between the two Asian giants, it’s anybody’s guess whether, in the second quarter of this century, China will continue to grow steadily or stagnate like Japan. That said, if a position on this question is to be taken, I, who have had the opportunity to look at Chinese culture and economy closely, am inclined to state that China will not stagnate, though its economic growth will most likely moderate.

The writer is an Islamabad-based columnist. He tweets/posts @hussainhzaidi and can be reached at: hussainhzaidi@gmail.com