Hard lessons for China from Japan`s rise and fall
Something strange is going on in China: economic scholars are looking to Japan for inspiration.
Poring over the lessons China can learn from the country it overtook in 2010 to become the world`s second-biggest economy has long been a thriving cottage industry.
In Chinese circles, the main conclusion is that Beijing must on no account fall into the currency trap that Washington laid for Tokyo and needs to resist US pressure for a sharp rise in the yuan.
According to received wisdom, it was a spike in the yen at America`s behest that pumped up Japanese asset prices in the late 1980s. When the bubble burst in 1990, it ushered in two decades of stagnation from which Japan has still not really recovered.
Some Chinese researchers, however, have been going further back in history.
They want to emulate the Income Doubling Plan launched in 1960 by Prime Minister Hayato Ikeda, which underpinned a decade of golden growth in Japan. The China Development Research Foundation in Beijing invited a professor from the University of Tokyo just before Christmas to give a lecture on the subject.
Invoking the plan is appealing because China today is at roughly the same stage of development as Japan was then. Ikeda stoked consumption by cutting taxes, bolstering welfare, raising farm prices and reducing income inequality. China needs to do the same.
The problem, according to economist Ting Lu with Bank of America Merrill Lynch, is that some advocates have distorted Ikeda`s plan.
Somewhere along the way, his aim of doubling Japan`s national income - which was easily achieved -- has mutated into a leftist goal of doubling Chinese labour income over the span of the ruling Communist Party`s five-year plan for 2011-2016.
"The most dangerous thing for the Chinese government to do would be to regulate too many prices, including wages," Lu said.
In the five-year plan that just ended, China wanted wages to lag just behind GDP growth. By contrast, as part of the next blueprint, to be unveiled in March, labour and household income would rise in line with or faster than overall growth, Lu said.
But he said Beijing would make a rod for its back if it mandated a 20 percent increase in the minimum wage every year. What if there was another financial crisis and costs had to be cut?
"Just let the market do the job to determine people`s wages," Lu said. "Migrant workers wages have been growing 20 percent, not because of government regulation but because of supply and demand for labour."
Yifan Hu, chief economist at CITIC Securities in Hong Kong, said the five-year plan would embody the spirit of Ikeda`s scheme.
"The Japanese plan wasn`t a single idea to increase salaries or household income, but a comprehensive plan," she said.
Above all, Beijing would prioritise tax reform to put more money in people`s pockets and spread national wealth more fairly.
"The most important thing is to increase income, because across Asia you can see the propensity to consume is quite low no matter whether you have a good social security network or not," Hu said.
The currency factor
As for the role of the exchange rate, a recent International Monetary Fund working paper finds no evidence that the yen`s rise was to blame for Japan`s stagnation.
In fact, thanks to supportive macroeconomic policies, Japanese GDP growth had rebounded to 7 percent by 1987, according to Papa N`Diaye of the IMF`s China desk.
The problem, he writes, is that Japan kept policy loose for too long. Monetary easing by the Bank of Japan after the 1987 Louvre Accord aimed at halting the dollar`s fall, together with incentives to expand consumer and mortgage credit, lit a rocket under equity and land prices.
On the face of it, China is now in similar shoes: credit growth, investment and property prices are all bounding ahead.
But N`Diaye sees grounds for optimism that China can manage its rebalancing better than Japan did.
First, China`s household, corporate and government debt is much ower than Japan`s was in the 1980s. Second, China is at an earlier stage of development and so can grow faster before overheating. And third, China has already started to stem the run-up in property prices.
"The right calibration of policies -- including prudent monetary policy and an increase in real interest rates -- should allow China to avoid the boom-bust asset cycle that was experienced in Japan," N`Diaye writes.
N`Diaye notes another big difference between Japan then and China now -- the latter`s financial sector remains highly regulated.
Chinese central bank governor Zhou Xiaochuan has said that interest rates could become more market-driven in the coming five years.
But if China truly wants to learn from Japan, it will tread carefully.
Hiroshi Shiraishi, an economist with BNP Paribas in Tokyo, said deregulation of deposit rates in Japan from the mid-1980s meant banks faced higher funding costs while demand for loans slumped after firms were allowed to issue euroyen bonds.
Their response? Excessive risk-taking.
"Financial liberalisation and deregulation were by no means solely to blame for Japan`s asset bubble of the late 1980s, but clearly had a significant impact on bank behaviour," Shiraishi said in a recent report.
Examining China through the prism of Japan is instructive. But why isn`t there more discussion of what China can learn from, say, South Korea instead of Japan`s Income Doubling Plan?
"The demographic structure is totally different, as is the external market, but people always like to compare China with Japan," said Hu with CITIC Securities.