Japan is back, China is over. Only a few years ago, such an assertion would have been dismissed out of hand. The latter was on the road to economic dominance and the former languished, characterised by endless stimulus that produced little tangible benefit, and doomed by a shrinking population. This narrative was overdue for a correction, and an alternative has finally arrived. Unfortunately, it shares some of the flaws of the old story.
The contemporary crush on Japan has much to commend it. Wages are gathering steam, the Nikkei 225 stock index recently surpassed the peak reached in the late 1980s, when the nation was seen as having some magic sauce that drove its ascent, and the central bank is preparing to end the world's last remaining experiment in negative interest rates. Even the difficult demographics look reasonable relative to Singapore, South Korea — and China. Like a classic market overshoot, few people are eager to speak ill of newly cool Japan.
The appetite for good news has reached almost absurd levels. Bank of Japan officials are called hawkish for desiring to push borrowing costs from a bit less than sero to around sero. Such a step, which may come as soon as next week, is rich in symbolism. The development is also miles away from the hiking cycle embarked upon by the Federal Reserve or the European Central Bank. Yes, deflation is behind and inflation is now hovering around the 2 percent target. But that is mild compared with the clip of price increases in the US, which exceeded 9 percent at one point in 2022. Context of this kind doesn't get aired enough. Japan's challenges haven't gone away, just as the country wasn't totally washed up during the so-called lost decades.
The troubles in China's economy have been building for a while. The country was enduring a long-term slowdown even before efforts to control Covid produced a rare decline in gross domestic product in the first months of 2020. But people had fallen in love with a China that possessed unique attributes and had enjoyed a historic rise in living standards. It took time for this vision to dislodge. When the idea of an invincible China did take a fall last year, it did so with a vengeance.
A recent statistical anecdote about Germany and Japan is revealing of the current mood. When Tokyo first reported GDP numbers for the fourth quarter of 2023, the data showed not only that Japan slipped into a recession, subsequently revised away, but that the country had ceded the No. 3 place in the world economic league to Germany. The change rated a perfunctory mention in many news stories, probably because nobody is impressed by the current form of Europe's commercial power. Germany has experienced pretty stagnant growth lately.
Compare that with the fanfare when China pulled in front of Japan in 2010 to claim the mantle of second place behind the US. The switch was seen as the culmination of tectonic forces inexorably pushing China forward. Surely, it was a matter of time before America lost the mantle. Yet, problems were brewing. In Bloomberg's news story on the eclipse of Japan, Kenneth Rogoff, a Harvard University professor, presciently warned of a Chinese property collapse. Deflation dogs China.
Does the current mood exaggerate China’s shortcomings and give enough space to things that it’s doing well? Growth is still likely to be north of 4 percent this year, exports are climbing nicely, and the country is becoming a clean-tech powerhouse. But that's the beauty — and downside — of narratives. They tend to oversimplify complex matters, minimise nuance, and can outlive their usefulness.
Some compelling economic accounts appear “mysteriously and for no apparent reason,” Nobel laureate Robert Shiller said in his book Narrative Economics: How Stories Go Viral and Drive Major Economic Events. Among them, he said, was the idea that ultra-low interest rates in the West after the failure of Lehman Brothers Holdings Inc. meant a long malaise beckoned, similar to Japan's experience in the 1990s.
“The Japanese ‘lost decades’ story is just one example, just one observation, and hence of no statistical significance, but it was contagious enough around the world to rekindle the Great Depression narratives, and it launched serious fears about ‘secular stagnation’,” Shiller wrote.
Ideas can come and go, and come again. The mania for Japan may abate if the current bright spot is really another false dawn. China may just be experiencing the emergence of economic cycles that affect every large economy. Policymakers in Beijing aren't the first to wrestle with too-low inflation or the effects of a housing slump, nor will they be the last. Remember the confident pronouncements in the early 2000s that the days of dollar supremacy were limited? The greenback still sits comfortably on its perch.
So, let's hear it for skepticism. India is now widely proclaimed as the hot new thing, a replacement for China as the comer economy. What could possibly go wrong with that narrative? Repeat it often enough and it may come true. Until the next one comes along.
Daniel Moss is a Bloomberg Opinion columnist. Views do not represent the stand of this publication.
Credit: Bloomberg
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