8 Supply-Side Factors Proving China Isn’t Like Japan In The 90's

In this video, I take a deep dive into the often-debated comparison between China’s economy today and Japan’s #economic #stagnation in the 1990s, a concept dubbed " #Japanification ." Using a framework from the #bankofjapan , I explore whether #china is truly following Japan’s path by examining supply-side issues and idiosyncratic cultural/institutional factors. Having analyzed demand-side issues in a previous video, I now shift gears to unpack why I believe China only shares about 30% similarity with Japan’s economic decline. From currency dynamics to labor markets, I’ll walk you through my reasoning and what it means for China’s future and #globalmarkets .

#currency Appreciation : One of the big stories in Japan’s 1990s decline was the yen’s massive appreciation—up 60-70% even after the 1989 #bubble burst—which tightened monetary conditions and fueled deflation. I compare this to China, where the CNY has actually weakened, dropping 15% in real terms over the last few years, making it as cheap as it’s been since 2014. To me, this is a stark contrast that sets China apart from Japan’s trajectory.

#offshoring and Market Share: Japan’s rising costs in the 1990s pushed companies to move #manufacturing overseas, tanking its global market share. I look at China today and see the opposite—export volumes are surging, and China’s global market share is stronger than ever. There’s no sign of the competitiveness loss that hit Japan, which makes me question the "Japanification" label here.

#import Competition: Japan’s relatively closed economy in the 1980s left it vulnerable to a flood of cheaper imports in the 1990s, hurting domestic firms. In China, I find a different picture: imports have flatlined over the past 2-3 years while exports soar. To me, this “reverse import penetration” suggests China’s not facing the same pressures Japan did.

Supply-Side Driven Price Falls: Falling prices in Japan’s 1990s were unique: PPI deflation hit while global prices rose. I note that China’s recent PPI deflation isn’t so special; it mirrors trends in the U.S. and elsewhere. This tells me that China’s price drops aren’t driven by the same supply-side forces that plagued Japan.

Expensive vs. Cheap Economies: Japan in the 1980s was an expensive place, its price level was double the global average, worsened by yen appreciation. I contrast this with China today, where there’s no sign of an overvalued currency or excessive domestic costs. To me, this fundamental difference undermines the idea of China following Japan’s path.

#labor Market #regulations : Japan’s regulated labor market—think lifetime employment, forced companies to deregulate and hire cheaper part-time workers in the 1990s, cutting wages. I point out that China’s labor market, with 300 million unprotected migrant workers, is already flexible, meaning it doesn’t face the same cost-cutting pressures #japan did.

Preference for #employment Over #wages : In Japan, cultural norms favored keeping workers over cutting pay, leading to wage deflation. I highlight how China’s private sector behaves differently, laying off millions during crises like 2009 or 2021-2022 showing a U.S.-style approach that avoids Japan’s deflationary trap.

Falling Wages and #deflationary Equilibrium: Japan’s long-term wage cuts locked it into a deflationary equilibrium where prices couldn’t rise. I argue that China’s wages, while growing slower under pressure, aren’t falling outright, suggesting it’s not stuck in the same cycle Japan endured.

Overall Assessment and Implications: Wrapping up, I score China at just 30% similarity to Japan’s 1990s woes across 15 factors. While China has its challenges—like property and consumption, I don’t see it heading for Japan’s no-growth fate. For markets, I think this means China’s interest rates may have bottomed out, unlike Japan’s endless decline.

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Chapters:
00:00 - Introduction by Paul Cavey from East Asia Econ
00:15 - Comparing China Today to Japan in the 1990s
00:54 - Recap of Demand Side Issues from Previous Video
01:22 - Introduction to Supply Side and Idiosyncratic Issues
01:43 - Scorecard #1: Currency Appreciation (Japan vs. China)
04:10 - Scorecard #2: Offshoring and Global Market Share
05:44 - Scorecard #3: Import Competition
06:59 - Scorecard #4: Supply-Side Driven Fall in Prices
08:25 - Introduction to Idiosyncratic Cultural/Institutional Factors
08:46 - Scorecard #5: Expensive vs. Cheap Economies
10:26 - Scorecard #6: Labour Market Regulation
12:47 - Scorecard #7: Preference for Employment Over Wages
14:32 - Scorecard #8: Falling Wages and Deflationary Equilibrium
15:54 - Overall China Japanification Score (30% Similarity)
16:39 - China’s Economic Challenges vs. Japan’s Stagnation
17:23 - Market Implications and Interest Rates
17:34 - Closing Remarks and Subscription Call