Lessons for China from Japan

  China today and Japan in the 1980s share some superficial similarities  However, China is at a much lower stage of economic development than Japan in the 1980s  China faces different structural challenges, but it can learn from Japan’s policy errors Japan’s reversal from what looked like imminent economic supremacy in the 1980s, to two “lost decades” from the 1990s, makes for a convenient cautionary tale. There are certainly some superficial similarities with China today: a slowdown in growth leading to fears of a hard landing, high and less efficient investment, current account surpluses, currency appreciation, rapid increases in asset prices, poor demographics and deflation. However, these are two countries at very different stages of economic development. China’s GDP is huge in absolute terms, but it is still a middle-income country in per capita terms. By contrast, Japan had already reached first-world levels of income per capita by the 1980s and was a leader in technological innovation. China still has room for catch-up growth, just as Japan’s trend growth did not slow down in the 1960s when it was at China’s stage of development now. Unlike Japan, China has more policy flexibility to handle challenges such as weak demand and asset price corrections. China’s financial liberalisation started late, so the stock market is small relative to the size of its economy, and household indebtedness is low. China also took a more gradual approach to capital account liberalisation, at least initially, resulting in less disruptive currency appreciation. However, China can learn important lessons from Japan’s slow and uncoordinated response to deflation. Japan’s policy mistakes showed that sustained deflation causes long-term economic damage if not pre-emptively treated by the right mix of both monetary and fiscal policy. With global demand growth unlikely to be as strong as before 2008 or indeed in the 1980s, China should ease policy further and sooner.Macro China/Japan Economics Lessons for China from Japan Don’t wait for deflation to stick 19 June 2015 John Zhu Economist The Hongkong and Shanghai Banking Corporation Limited +852 2996 6621 john.zhu@hsbc.com.hk Izumi Devalier Economist The Hongkong and Shanghai Banking Corporation Limited +852 2822 1647 izumidevalier@hsbc.com.hk Qu Hongbin Chief China Economist The Hongkong and Shanghai Banking Corporation Limited +852 2822 2025 hongbinqu@hsbc.com.hk View HSBC Global Research at: http://www.research.hsbc.com Issuer of report: The Hongkong and Shanghai Banking Corporation Limited Disclaimer & Disclosures This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it 2 Macro China/Japan Economics 19 June 2015 abc Less than meets the eye 3 The use and abuse of history 3 Useful bridges to somewhere 4 Inefficiency ratios insufficient 5 Still learning from others 6 Assets and the real economy 7 The perils of property 8 Reducing external surpluses 9 Not too big of a bang 10 Lessons from Japan 11 Treatments available 11 From slowdown to stagnation 12 1. Monetary easing: Too little, too late 12 Forecast bias 13 Moral hazard concerns 13 2. Fiscal policy: The perils of premature tightening 14 3. Delayed banking reforms 15 Lessons from Japan 15 1. Avoid the deflation trap 15 2. Monetary policy is not a substitute for restructuring policies 16 3. The need for a complementary fiscal policy 16 Lessons learnt? 17 Late in the day on deflation 17 Once in, hard to get out 18 Different tools for different goals 19 Conclusion 19 References 20 Disclosure appendix 22 Disclaimer 23 Contents 3 Macro China/Japan Economics 19 June 2015 abc The use and abuse of history Japan’s rapid slowdown in 1990s after the bursting of its stock market and property bubbles from the late 1980s has been one of the most-studied crises in recent times. However, it is one thing to learn the lessons of economic history; it is quite another to actually implement them. There are many superficial similarities between China today and the Japan of the 1980s. Both countries invested a high proportion of their GDP every year, ran trade surpluses, liberalised their financial sectors and capital accounts, and experienced bull markets in housing and equities. However, we think it is the differences rather than the similarities which prove more important, and should mean China is unlikely to fall into the same kind of slump that befell Japan. The chief difference is that China today is at a very different stage of economic development than Japan was in the 1980s. As a much less developed country in per capita terms, China’s potential for catch-up growth has not been exhauste