The "Japanization" of Chinese Economy and Fears of Prolonged Stagnation
― Repeated Postponements of Structural Reforms Raise the Possibility of the Country Experiencing a "Three Lost Decades” ―

In China, the economic recovery that followed the abandonment of the zero-COVID policy ground to a sudden halt, and uncertainty about the future is increasing. Furthermore, economic phenomena very similar to those seen in Japan after the bursting of its bubble economy are beginning to be seen in China. They include deflation, an "employment ice age," and a real estate slump, and there is growing concern that the economy will fall into a prolonged stagnation much like the "Three Lost Decades" that Japan experienced.

Of course, the Chinese government has been studying the history of the Japanese economy. It has tightened its control over the property market and so far managed to prevent a real estate bubble burst. As a result, there has not been a sharp deterioration in consumption and investment stemming from balance sheet adjustment. Furthermore, the Chinese government has embarked on structural reform, having acknowledged that economic growth to date has been overly reliant on investment. However, the steps taken have not been sufficient, and the transition from an investment-driven economy to a consumption-driven economy is not going smoothly. Structural reform has been repeatedly postponed, and this has contributed to a decline in the economy's ability to grow. As happened in Japan, a sense of stagnation caused by the lack of progress with reform seems to be sapping the vitality of the Chinese economy.

The prescription for China's economy to avoid prolonged stagnation is to not delay structural reform and to make steady progress with efforts to correct its investment-oriented economic structure. To that end, even if the economy worsens, the long-standing structure should not be preserved by easing real estate regulations and expanding infrastructure investment as a quick-fix economic stimulus measure. So far, the Chinese government has remained cautious, refraining from implementing large-scale economic measures. Measures to support the real estate sector through deregulation and other measures have been small-scale, with priority placed on shoring up balance sheets through real estate market adjustment.

However, pressure for a correction in the property market has been rapidly intensifying recently, and the risk of a chain of corporate failures culminating in a real estate crisis can no longer be ignored. The high-tech industry, which was supposed to replace the real estate sector as the driver of future economic growth, is also struggling to grow amid tighter control by the Chinese government and stricter regulation by the U.S. government. If the twin dangers of a real estate crisis and sluggish growth in the high-tech industry result in a serious economic downturn, the Chinese government is likely to switch its policy focus to short-term economic support, backsliding into real estate deregulation and infrastructure investment expansion. While such measures will help avoid a sharp economic downturn, they will also entail the postponement of structural reform and increase the likelihood of prolonged economic stagnation.

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