China must learn from Japan’s ‘lost decades’

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The writer is chief executive of Suntory Group

After its economic bubble burst in the early 1990s, Japan endured more than three “lost” decades in a prolonged struggle against deflation — an invisible monster.

The true horror of deflation can only be properly understood by those who have experienced it first hand. For more than a decade, I served as a member of the Council on Economic and Fiscal Policy under three prime ministers, playing a role in guiding the Japanese economy. Six of those years were during the period in which “Abenomics” was implemented.

Today, Japan at last stands on the brink of an exit from those years. The war in Ukraine, intensifying tension between the US and China, and significant rises in the cost of imports have begun to move previously frozen domestic prices, triggering the highest wage increases in more than 30 years.

Meanwhile, the Bank of Japan has finally decided to end the policy of negative interest rates, indicating the start of a positive economic cycle. As a consequence, Japan is at a tipping point, reviving corporate “animal spirits” previously dulled by the effects of unconventional monetary easing and a failure to fully implement the kinds of structural reforms that former prime minister Shinzo Abe understood were essential.

What lessons does Japan’s experience hold for other countries, notably China? Reflecting on those “lost” decades, it is clear that current consumption patterns and price stagnation in China may lead to a situation even more serious than that which Japan found itself in during the era of deflation. Nonetheless, there are several significant parallels between the past experience of Japan and China’s predicament today.

Consider first, population composition. With China’s population beginning to decline in 2022 and the effects of its one-child policy, ageing is likely to accelerate at a pace equal to or greater than Japan’s.

Then there are fears about the relationship between social security and high savings rates. China’s social security system provides an inadequate safety net for lower-income groups. Anxiety over the shortcomings of social security provision has been cited as a cause for the high savings rate, which exceeds 40 per cent of GDP.

The third factor to bear in mind is the extremely high youth unemployment rate. Though direct comparison is difficult, Japan’s youth unemployment rate post-bubble burst was about 10 per cent at its highest. The situation in China is more severe.

Taken together, these conditions are redolent of Japan’s past, when profound anxiety about the future suppressed investment and consumption, leading to “status quo disease” and eventually a deflationary spiral. That said, modern China does have advantages that Japan did not enjoy, notably in the leveraging of digital technologies, including artificial intelligence. However, a surveillance society that hinders innovation and casts a shadow over private companies remains a point of concern.

Drawing on the Japanese experience, what does China need to do today?

Ultimately, it comes down to animal spirits and encouraging risk-taking in the private sector. Instead of suppressing it through surveillance, China should create mechanisms to reward risk-taking by companies and individuals with the aim of creating an economy led by private enterprises, not state-owned ones. Simply put, China’s willingness to produce business leaders and companies to emulate Jack Ma and rival the so-called Magnificent Seven will be put to the test.

But to do this, regulatory relaxation to stimulate domestic demand and innovation, especially in the social security sector, is essential. Furthermore, considering how Japan’s failure to invest in human resources sapped its powers of economic recovery, China must not slow private investment in talent, especially now that the economy is stagnating.

Additionally, if China’s inability to rely on exports despite its excess production capacity continues, it may be forced to support its domestic economy — even at the cost of worsening government finances. Some changes are discernible, for example in moves to attract fresh foreign direct investment in China. But continuing to open its doors both domestically and internationally is critical.

As Japan’s recent history shows, once an economy is deep into deflation, turning things around is not easy. China needs to start the process of reform now. A proper economic dialogue between Japan and China is needed now more than ever — for the sake of the global economy. I hope that China learns from the Japanese experience and that fears of a plunge into serious deflation will prove to be groundless.