NIKKEI ASIAN REVIEW
As Abe visits Xi, Japan’s economic record has painful lessons for both leaders
October 24, 2018
Shinzo Abe’s trip to Beijing is one for the history books. The first formal summit between Japanese and Chinese leaders since 2011 rekindles Asia’s most vital relationship at a pivotal moment.
Yet as Prime Minister Abe plots the future with President Xi Jinping, he may sense eerie parallels with the past. Not just China’s long-held preoccupations with wartime suffering, but also more recent economic events — Japan’s bubble years, and their damaging continuing fallout.
While on the surface China’s economy appears strong, the financial wreckage in Shanghai and Shenzhen will remind Abe of Tokyo circa 1990. The reckoning in China’s bourses — and Beijing’s response — is following Japan’s playbook to an alarming degree.
China short-sellers have valid reasons for doubt. Donald Trump’s escalating trade war is kicking the legs out from under a debt-ridden, ubalanced economic system. China would be less vulnerable to the U.S. president’s tariffs had Xi acted faster to curb China’s addictions to exports and excessive credit. Complacency now haunts the Xi era.
Xi’s team is compounding China’s predicament in ways eerily familiar to Japan’s Liberal Democratic Party. Sadly, any advice Abe might offer would fall wide of the mark, given his party’s own economic baggage.
Still, Japan’s lessons are worth heeding. China’s experience in the 2010s often seems a replay of Japan’s 1980s. Japan had an unblemished record of rapid growth, corporate giants spreading their wings, and a government supporting national champions with state-directed financing and limits on foreigners’ market access.
Western best-seller lists featured titles on Japan’s coming dominance. Ezra Vogel’s 1979 book “Japan as Number One” set the stage for a decade of fear and loathing to come for corporate America. Yet by the time then-Congresswoman Helen Bentley warned in 1990 America was “rapidly becoming a colony of Japan,” it was all over. Epic bubbles in credit, stocks and property were rapidly deflating.
Bank of Japan rate hikes beginning in May 1989 had executives in a panic. The same went for LDP bigwigs who pressured the BOJ to print yen. They churned waves of stimulus into a traumatized economy. They bailed out banks and companies. They started Japan on a path to titanic public works, financed with public debt.
Stability came at great cost. All that largesse left Tokyo with the biggest debt burden anywhere and the zombification of entire sectors. Deflation set in. Japan Inc. plummeted on competitiveness tables. The animal spirits that once buoyed the nation gave way to timidity.
Japan’s mistake: refusing to accept its reckoning. Rather than letting some big players fail, the state ramped up corporate welfare. Instead of allowing stocks settle where they may, politicians prodded the BOJ to pump fountains of monetary elixir. Japan’s “concrete economics” model went into overdrive to shelter rural regions from pain.
Before the LDP knew it, it was 2012, the year it turned to Abe to flip the script. Yet Abenomics has repeated the mistakes. It bet massive stimulus and a weaker yen would restore Japan to greatness. After a few wins on corporate governance, Abe pivoted to national security. Nearly six years on, 2% inflation remains elusive. Wage gains are not big enough to unleash a virtuous cycle. Now, Trump’s trade war threatens to set Abenomics back to square one.
This predicament will sound all too familiar to Xi’s team. Its 2013 pledge to let market forces play a “decisive role” is looking no more credible than the LDP in the 90s. Nowhere is this dynamic more obvious than in the stock market where Xi’s men are throwing everything they can at equity short sellers — just like they did in 2015.
On Saturday, Xi’s Financial Stability and Development Committee met for a 10th time in two months. This team is tasked with keeping Trump’s escalating tariffs from devastating investor confidence. Vice Premier Liu He has been particularly vocal about Beijing boosting support for companies and markets. Shanghai shares are down 22% this year.
Those efforts are working somewhat. Chinese shares jumped earlier this week as Beijing signaled a fresh stimulus. That includes new tax cuts to boost sentiment following a weaker-than-expected 6.5% third-quarter economic growth rate, the slowest since 2009. Ma Jun, a People’s Bank of China adviser, reckons the measures could add 1 percentage point to gross domestic product.
Yet they will exacerbate Beijing’s imbalances. After six years in power, it is time Xi weaned China off ever-increasing doses of debt. That means curbing the influence of state-owned enterprises to create more space for a vibrant private sector. It means increasing transparency and higher governance standards. It means accelerating efforts to reduce China’s dependence on exports, and expanding services.
Xi claims to be making these upgrades against all evidence. Talk alone will fall flat. Take China Everbright, the nation’s biggest asset manager. In an Oct. 23 Bloomberg interview, CEO Chen Shuang warned markets are relying more on stimulus than underlying fundamentals. “Long-term growth cannot rely on policy drive,” Chen said.
Abe must do reforms, too. He has been glacial about upending rigid labor markets, reducing bureaucracy, supporting startups, narrowing gender-pay gaps and offsetting the effects of an aging population.
Clearly, Abe’s three-day stay in China beginning Oct. 25 is an opportunity to share notes. The tete-a-tete might just as easily highlight a tantalizing irony in Asia: How the region’s strongmen are not being strong enough.
Xi is the most potent Chinese leader in generations; Abe is on track to become Japan’s longest-serving leader. But both are surprisingly timid in taking on vested interests. It is a broader problem in Asia. Neither Narendra Modi of India nor Rodrigo Duterte, the tough-talking Philippine president, has been willing to upend the status quo. The Thai military junta that grabbed power in 2014 promising epochal reforms is coasting along.
Just like Japan these last 28 years, China is treating the obvious fallout from its debt troubles, not the cracks under the surface. That shiny economic exterior is on display for Abe and the world to see. But history will not be kind to the Xi era if Beijing does not get under China Inc.’s hood, and fast.
William Pesek is an award-winning Tokyo-based journalist and author of “Japanization: What the World Can Learn from Japan’s Lost Decades.” He was given the 2018 prize for excellence in opinion writing by the Society of Publishers in Asia, for his work for the Nikkei Asian Review.