China is not turning Japanese

Days and nights in Kyoto

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– Michael Kamen, Brazil

As the threat of deflation stalks China’s economy, the China-watching herd has resurfaced an old question from the rotation: Is China turning Japanese? The well-known script, in the words of a media-anointed analyst:

China’s economic growth has followed what’s sometimes called “the Japanese model.” In Japan and other Asian countries, this model has proved extraordinarily successful in the short term in generating eye-popping rates of growth – but it always eventually runs into the same fatal constraints: massive overinvestment and misallocated capital. And then a period of painful economic adjustment. In short: Beijing, beware.

According to the narrative, China is now facing a Japan-style reckoning with its property sector stuck in the doldrums for over three years. Of course, the above quote was written in 2010 when China’s economy was less than half its current size and annual investment in residential property would still triple. Some people just like to be early.

Japan is sui generis. No nation’s economy has underperformed so lamentably for so long after outperforming so spectacularly for even longer. It’s just not true that every country that has followed “the Japanese model” has had to suffer long periods of painful economic adjustment – at least nothing approaching Japan’s malaise.

None of the four Asian Tigers (South Korea, Taiwan, Hong Kong and Singapore) have experienced multiple decades of stagnation. And all of their per capita GDPs, coming from far behind, now exceed Japan’s on a purchasing power parity (PPP) basis.

South Korea shook off the 1997-98 Asian financial crisis, reformed its