SIMILARITIES
1. both had high saving and investment rates, along with a rapid accumulation of external wealth that funded purchases of prime assets around the world.
2. Chinese economy today is experiencing real estate and stock market bubbles, rising debt, heightened default risks and un-ending lending to zombie companies just like Japan.
FIGURES
1. In 1980, Japanese per capita GDP was 30% below that of the US. Ten years later, the gap was only 17% but between 1991 and 2003, Japan stagnated, and growth virtually stopped.
2. Between 1991 and 2003, Japan's GDP grew at a mere 0.7% per year (compared to 4.6% in the previous four decades).
WHAT WENT WRONG IN JAPAN
1. Financially constrained firms were no longer able to make the investments they needed to grow. This situation was prolonged and exacerbated by problems in the financial system and policy responses.
2. between 1983 and 1991, total factor productivity grew at an average rate of 2.4% a year. In the lost decade, it grew on average just 0.2% a year.
3. productivity growth is primarily derived from innovation and the adoption of new technologies. During that era, technological adoption was also slower than other advanced economies – for instance, the diffusion of computers was faster in both the US and South Korea.
CURRENT CHINA
1. China’s productivity growth – which has been an important economic driving force for the past 30 years – is primarily a result of two large structural transformations, and not innovation and technological adoption as in the case of Japan.
2. The stage of each country’s demographic transition is also vastly different. It won’t be until 2050 before the over-65s will make up a quarter of China’s population.
3. Labor productivity is still growing at a rapid pace. Its human capital accumulation is rapidly accelerating, and converging with advanced economies.
INFLATION/DEFLATION
1. One of the main causes of the rising debt burden and financial stress on corporations in Japan was deflation. The country was cast into a debt-deflation spiral and a prolonged liquidity trap.
2. China, however, is at no risk of either deflation or liquidity problems. If anything, it has to fight growing inflation and mounting inflation expectations.
THOUGHTS
1. Developing countries like China have grossly misallocated resources and reducing the distortions and moving capital and labor from low-productivity areas to high-productivity ones could result in significant productivity gains.
2. While there is a parallel between China today and Japan a few decades ago, the analogy is inaccurate first and foremost because they are/were in very different stages of development.
