Commentary on Political Economy

Thursday 7 September 2023

Investors pon­der the ‘Japan­i­fic­a­tion’ of China

Back in the day, US food dip­lomacy was easy. Arnold Schwar­zeneg­ger (as it might be) would turn up in Tokyo, pose in a super­mar­ket with grapes and bell pep­pers and order Japan to eat more Amer­ican pro­duce.

Last week, as China banned Japan­ese sea­food imports and dialled-up the anti­Ja­pan­ese rhet­oric on the release of treated radio­act­ive water into the sea, the US ambas­sador, Rahm Emanuel, trav­elled 300km north to Fukushima. He prom­in­ently ate local fish, shopped for local peaches and vowed to feed them to his fam­ily. The mes­sage to China was clear: stop mess­ing with our friends, Japan’s fish and fruit are fine.

The com­plex­ity for investors, as many of them have voiced on the side­lines of recent con­fer­ences in Asia, lies in the broad reset of think­ing that this swerve of US dip­lo­matic pri­or­it­ies seems to imply. Since arriv­ing in Tokyo nearly two years ago, Emanuel has made a habit of tak­ing an undip­lo­mat­ic­ally strident line on China: the pivotal ques­tions are how much of this stridency is licensed, how much is actu­ally now per­man­ent, cross-party Wash­ing­ton con­sensus, and how much, real­ist­ic­ally, is it ever likely to scale back?

The answer mat­ters pro­foundly, say fund man­agers, because of the ever rising pres­sure to make a call on China’s investabil­ity over the next 20 years and the increas­ingly size­able geo­pol­it­ical com­pon­ent of that cal­cu­la­tion.

There is some fine work on the sub­ject. In a note pub­lished last week by the Nomura Research Insti­tute, the eco­nom­ist Takahide Kiu­chi warned that, between them, the US and China were lead­ing the world into a “quiet crisis”.

And con­veni­ently for those seek­ing more imme­di­ate guid­ance, the Asia invest­ment con­fer­ence sea­son is in full cry. Last week the jam­boree host was JPMor­gan; this week it is con­cur­rently Mizuho, Bank of Amer­ica and Jef­fer­ies, next week it will be CLSA, BNP Pari­bas and Gold­man Sachs. Intriguingly, one of the most con­sist­ent fram­ings of the China ques­tion being put to the experts and ana­lysts on parade at each of these bun­fights has been whether China’s eco­nomy is under­go­ing “Japan­i­fic­a­tion”.

The term has been kick­ing around in the con­text of China ana­lysis for some time. And it works because it neatly reduces a very large suite of investor con­cerns into a more bin­ary buy-sell prob­lem: does China escape its woes in a couple of years or does it endure one or more “lost dec­ades”, as did Japan through the 1990s and 2000s?

The obvi­ous start­ing point with this line of inquiry has been to com­pare the many fea­tures that drove the infla­tion of Japan’s prop­erty bubble in the late 1980s with the many fea­tures it shares with China’s today. Then fol­lows an extra­pol­a­tion on whether the great rot­ting heap of prob­lems that res­ul­ted from the burst­ing of Japan’s bubble will also be left in the wake of China’s.

Some of this the­or­ising is con­vin­cing, but there are a few too many “yes, but” dif­fer­ences (pop­u­la­tion size, per cap­ita income, polit­ical regime etc) for the ana­logy to be com­pletely sat­is­fy­ing. In some cases, like the faster pace of demo­graphic decline, China’s cur­rent prob­lems actu­ally look more threat­en­ing.

But in a report pub­lished in mid-August, and in sep­ar­ate dis­cus­sions around it, Cit­ibank eco­nom­ist Johanna Chua intro­duces two addi­tional factors to the ana­lysis, both of which give the Japan­i­fic­a­tion fram­ing greater rel­ev­ance.

The first of these is the less meas­ur­able but still vital concept of col­lect­ive trauma — the cir­cum­stances that impose cau­tion on indi­vidu­als, house­holds and the private sec­tor over the long term, lower­ing demand and driv­ing the habit of risk-tak­ing out of daily life. In Japan’s case, the sheer scale of the bubble and its col­lapse provided this trauma. China’s, argues Chua, was its exper­i­ence with Covid-19 — and the pro­foundly unset­tling dis­cov­ery that the gov­ern­ment did not have every­one’s back in terms of fin­an­cial assist­ance and pro­tec­tion of sav­ings.

A second factor, sug­gests Chua, is geo­pol­it­ics, in par­tic­u­lar the rela­tion­ship with the US. Japan’s fric­tions with the US in the 1990s were largely con­fined to trade and ulti­mately resolved by, among other meas­ures, Japan’s decision to sub­sti­tute auto exports for local pro­duc­tion in the US. The cur­rent chal­lenges facing the US-China rela­tion­ship are much greater — and likely to be much more res­ist­ant to any equi­val­ent quick fix.

But as an answer to the broad Japan­i­fic­a­tion ques­tion, the soured geo­pol­it­ics are crit­ical. Fun­da­ment­ally, it asks whether an investor pon­der­ing the investabil­ity of China is look­ing at cycli- cal or per­sist­ent threat to growth. Without any clear exit route from the cur­rent state of US-China ten­sions, the lat­ter, unfor­tu­nately, seems more likely.

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