x Abu Dhabi, UAEThursday 18 January 2018

False dawn for Japan is false parallel for China

Those who deny the arrival of China as an economic power often cite as a precedent the false dawn of Japan's rise in the late 1980s.

Those who deny the arrival of China as an economic power often cite as a precedent the false dawn of Japan's rise in the late 1980s. Did that one-time Asian giant not presume itself to be successor to the US at the apex of global influence, they argue, only to have its pretensions collapse along with its huge asset bubble in 1990? There are definite parallels between the Japan of a quarter century ago and the latest chapter in China's relentless expansion today. Both countries have adopted the same export-centred model for growth, in which the state discourages household spending in favour of capital investment for the production of exportable goods, the revenue from which is then ploughed back into the manufacturing economy.

Capital controls and surplus liquidity often fuel speculation, which leads to asset inflation and economic and social instability. If it happened to ultra-modern Japan, so the argument goes, why not relatively primitive China, which is expected to post double-digit economic growth this year after spending its way out of the worst of the global recession? That line of thinking certainly holds true for some. Andy Xie, the former chief Asian economist for Morgan Stanley, told Bloomberg recently that China's property and stock markets have achieved bubble proportions and will burst sometime in 2011.

It would be naive to suggest China is somehow immune to the consequences of speculation, just as it is churlish to imply that a hard correction in asset prices would spell the end of China's 30-year modernisation drive. Keep in mind that Beijing's economic awakening and Japan's boom years began at more or less the same time and that the two countries have since taken dramatically divergent paths. Remember also that Japan's bubble was intensified by a strong yen, while China has assiduously and notoriously manipulated its currency to move at a par with the dollar.

If Japan is of little use as a barometer for China's fortunes, it does represent an ominous divination tool for the future of the US. Japan and America have more in common than either one does with China, in particular ballooning public deficits and political paralysis. The spectre of debt casts a long shadow everywhere these days, especially in Europe, where extravagant fiscal policies are straining the limits of the euro zone's so-called stability pact. Debt being piled up by Washington and Tokyo is in danger of becoming unredeemable.

Japan's huge deficits have become a structural rather than an aberrational feature of its economy, the result of Tokyo's inadequate response to its post-bubble recession, a recent report by PFC Energy says. The country now has the highest debt-to-GDP ratio among the world's top industrialised states. While government borrowing is owed mostly to its public and is therefore relatively easy to finance, its economy is fundamentally incapable of growing at a rate fast enough to reclaim some measure of fiscal rectitude.

Two decades after Japan's economic collapse, its domestic demand remains an anaemic source of growth relative to its manufacturing sector. Tokyo's failure to address the economy's most glaring weaknesses, from rigid labour laws that discourage innovation to huge agricultural subsidies that have made its farmers wards of the state, has all but consigned the country to economic oblivion. Perhaps most significant for a nation with such a rapidly ageing population, it has refused to internationalise itself by promoting immigration, condemning its working-age citizens to toil longer and harder to meet the needs of its growing generation of retirees.

Fundamentally, Japan these days is as parochial an economy as it was two decades ago, when prices for a metre of land in Tokyo's most affluent neighbourhoods were hovering at US$1 million (Dh3.6m). Now consider the US. The country is at the front end of a $10 trillion decade of public indebtedness and its political system is unable to reconcile the critical need for both entitlement reform and tax increases.

Thus Barack Obama, the US president, may soon hail Congressional approval of a watered-down healthcare bill that will do little to rescue his fellow citizens from a medical-services industry that is derelict, hugely expensive and, in the long term, unsustainable. Desperately needed US immigration reform has been precluded by a nativist backlash worthy of Japan's legendary and self-destructive xenophobia.

The economy is increasingly dominated by cartels and oligopolies, whether they be price-fixing airlines, subsidised agro-business companies or incestuous financial-services firms, so that the price of goods and services is determined less by competition in the marketplace than by negotiations in legislative chambers between corporations, politicians and regulators. The next 18 months may witness the piercing of China's ever-expanding speculative bubbles and the laying low of its economy. Given how far it has come, from the Cultural Revolution to the world's putative second-largest economy in a little over three decades, it is unlikely to be a definitive setback.

The outlook for the US and Japan, however, is not nearly so forgiving. @Email:business@thenational.ae