Why China should stop worrying and embrace ‘Japanification’

As I discovered recently, a person’s first trip to Tokyo can be an interesting experience. Its high standard of living, clean streets, orderly public life and inexpensive, dependable infrastructure are likely to impress a first-time visitor. However, puzzling as it might be, Japan’s GDP has not grown much since the 1990s despite clear evidence of a thriving economy. In US dollar terms, Japan’s GDP was higher in 1993 than it was in 2024. There are a few reasons for this disconnect. Some of it has to do with the shortcomings of GDP as a measurement and currency fluctuations, but the story does not change drastically when you measure Japan’s GDP in yen, at least up to 2022. Japan is just a few stages ahead of China, and the two mirror each other in many ways. They share concerns about growing debt levels, demographic decline, ageing society, inflated property prices, dependence on external balances, unproductive investment-led growth and deflation. However, Japan’s trajectory shows that disappointing GDP growth does not necessarily preclude modernisation. Its “lost decades” were marked by some of the world’s highest living standards, longest lifespans and cutting-edge industries. When commentators discuss China’s current challenges, “Japanification” is usually invoked as a warning. Perhaps this phenomenon should be read instead as a model. The real challenge for China is not how to sidestep Japan’s path, but what to learn from it. How did Japan get to this point? The post-war economic miracle Japan experienced was the result of market-conforming state planning, which suppressed household income and consumption to make way for higher national savings and investment to fund the state’s industrial policy. This development model came to be known as the “East Asian developmental state”. While this model was successful at building infrastructure and powerful private firms, a contradiction emerged. Japan succeeded at building up the supply side of its economy, but the demand side was neglected. As high levels of investment persisted past the point of necessity, this led to the emergence of asset bubbles, namely in property. At one point, the Imperial Palace in Tokyo was appraised as being more valuable than all the land in California. What goes up must come down, though. The bubble economy popped and asset prices fell sharply, and what followed the end of the bubble economy made growth hard to sustain. Banks and firms that were neck-deep in debt responded to the government’s loose fiscal and monetary policies by paying off their loans, muting their stimulus effect. The bursting of the bubble would have been painful in any case, but demographic headwinds turned what could have been a temporary slump into a persistent drag on growth. The total population of Japan peaked in 2008, further complicating GDP growth. In an acknowledgement of the threat of unproductive investment, the share of investment in Japan’s GDP fell from 35 per cent in 1990 to 23 per cent 20 years later. However, a look behind the top-line GDP number reveals a positive trend: behind the headlines of stagnation, living standards were quietly rising. Household consumption, a proxy for living standards, grew by 20 per cent from 1994 to just before the start of the Covid-19 pandemic, most likely thanks to an increase in the household sector’s share of national income. With the decline of investment and the increase in consumption, Japan began to rebalance. Turning to China, the thought of “Japanification” might scare policymakers and scholars alike, but what’s to fear? Japan dealt with the same issues currently facing China and continued to increase its standard of living. China’s debt burden has hit more than 300 per cent of GDP, its population is shrinking, its property market is still overpriced despite steady price declines, and its investment-driven growth model is running into problems. For any serious China watcher, Beijing’s main priority is clear: giving its citizens the highest standard of living possible to maintain political power. With this in mind, the lessons to draw from Japan are also clear: focus on growth in disposable income and living standards, not GDP. Beijing wants to take the correct steps in terms of its housing market issues, allowing prices to come back down to Earth, yet other lessons from Japan have yet to be realised. Focus government spending away from investments and redundant infrastructure projects – whose main purpose is to hit GDP growth targets yet do not make the country any more wealthy – to more social spending. This social spending could focus on China’s growing elderly population, such as higher pensions. Other areas could be expanding and deepening China’s healthcare system by training more doctors and increasing healthcare subsidies for all its citizens, regardless of their hukou status. Diverting government resources to social spending would directly raise the household’s share of national income while also improving the confidence of its people to spend more of their hard-earned income, thereby increasing consumption. China’s GDP growth targets could be changed to measure things that directly influence living standards. Local governments should be graded based on growth in household disposable income, household consumption, housing affordability and costs and access to state-subsidised medical care. If Beijing trades a point of GDP for fuller wallets, cheaper homes and better services, “Japanification” becomes a playbook instead of a prophecy of doom.

Why China should stop worrying and embrace ‘Japanification’

.css-1c6uqr6{color:inherit;font-weight:inherit;font-size:inherit;font-family:inherit;line-height:inherit;overflow-wrap:break-word;}If China trades a point of GDP for fuller wallets and better services, ‘Japanification’ becomes a playbook instead of a prophecy of doom

If China trades a point of GDP for fuller wallets and better services, ‘Japanification’ becomes a playbook instead of a prophecy of doom