Japan’s Economy Surges as China Struggles: A Tale of Two Markets
In a historic moment, Japan’s Nikkei Stock Average reached an all-time high of 39,098 points on February 24, surpassing its previous record set 34 years ago. This achievement has been hailed as a sign of economic optimism and a clear indication that Japan has finally emerged from its “lost decades” of stagnation. In stark contrast, China’s stock market has been experiencing a tumultuous start to the year, with significant losses and a five-year low for the Shanghai Composite. The divergence between these two economies has sparked discussions about the reasons behind Japan’s success and China’s struggles.
The recovery of Japan’s economy did not happen overnight but has been gradually building since the time of former Prime Minister Shinzo Abe. His policies aimed at stimulating the economy have led to a warming up of both the stock market and real estate market. The Nikkei Stock Average, which stood at around 8,000 points in 2013, has now surged to over 39,000 points, surpassing its previous high. This remarkable achievement demonstrates the significant progress Japan has made in its economic recovery.
Property prices in Japan have also been on the rise after plummeting following the burst of the real estate bubble. Tokyo, in particular, has experienced a surge in property prices over the past two years, making it a profitable investment opportunity. These positive trends indicate that Japan’s era of deflation is coming to an end, with inflation rates stabilizing above 2 percent. However, it is worth noting that this recovery is primarily driven by imports rather than domestic demand. While the financial sector, including the stock market and real estate market, is performing strongly, domestic demand still remains weak.
One factor that influenced Japan’s economic success in the past was the appreciation of the yen. As the yen appreciated, Japanese companies had to seek lower-wage areas overseas to reduce costs. This led to a shift in manufacturing processes, with different parts being produced in various countries and then assembled in a central location for sale. However, the gradual appreciation of the yen created expectations in the financial markets that it would continue to appreciate, resulting in a flood of foreign capital. This influx of capital contributed to Japan’s stock and real estate bubble, which eventually led to a prolonged period of deflation.
In contrast to Japan’s success, China finds itself stuck in the middle-income trap. This trap occurs when a country becomes entrenched at a certain level of economic development. China’s failure to move from imitation to independent innovation is seen as a key reason for its inability to overcome this trap. While Chinese President Xi Jinping emphasizes the importance of independent innovation, the necessary conditions for it to happen are not yet present in China.
According to economist Wu Jialong, there are three fundamental differences between Japan’s economic success and China’s stagnation. First and foremost is the investment in people. Wu argues that investments in education, healthcare, and the social safety net are crucial for developing a skilled and innovative workforce. Second, individual liberty plays a vital role in promoting innovation. Freedom of the press, freedom of speech, and freedom of thought and belief are essential for fostering a culture of creativity and innovation. Finally, the protection of private property rights and intellectual property rights is crucial for incentivizing technological innovation.
Wu believes that China’s lack of freedom and rule of law, as well as its political system, are at the root of its inability to achieve independent innovation. He criticizes the Chinese Communist Party’s “thousand talents plan” as a method to steal intellectual property from other countries rather than fostering domestic innovation.
As Japan celebrates its historic stock market peak, it serves as an important reminder of the power of economic reforms and policies aimed at stimulating growth. The Japanese economy’s divergence from China’s struggles highlights the significance of investing in people, fostering individual liberty, and protecting property rights. These lessons may prove invaluable for countries seeking to navigate their own economic recoveries and achieve sustainable growth.
