Japan Is Back, China Is Over. The Trouble With Narratives

Japan is back, China is over. Only a few years ago, such an assertion would have been dismissed out of hand. The latter was on the road to economic dominance and the former languished, characterized by endless stimulus that produced little tangible benefit, and doomed by a shrinking population. This narrative was overdue for a correction, and an alternative has finally arrived. Unfortunately, it shares some of the flaws of the old story.

The contemporary crush on Japan has much to commend it. Wages are gathering steam, the Nikkei 225 stock index recently surpassed the peak reached in the late 1980s, when the nation was seen as having some magic sauce that drove its ascent, and the central bank is preparing to end the world's last remaining experiment in negative interest rates. Even the difficult demographics look reasonable relative to Singapore, South Korea — and China. Like a classic market overshoot, few people are eager to speak ill of newly cool Japan.

The appetite for good news has reached almost absurd levels. Bank of Japan officials are called hawkish for desiring to push borrowing costs from a bit less than zero to around zero. Such a step, which may come as soon as next week, is rich in symbolism. The development is also miles away from the hiking cycle embarked upon by the Federal Reserve or the European Central Bank. Yes, deflation is behind and inflation is now hovering around the 2% target. But that is mild compared with the clip of price increases in the US, which exceeded 9% at one point in 2022. Context of this kind doesn't get aired enough. Japan's challenges haven't gone away, just as the country wasn't totally washed up during the so-called lost decades.

The troubles in China's economy have been building for a while. The country was enduring a long-term slowdown even before efforts to control Covid produced a rare decline in gross domestic product in the first months of 2020. But people had fallen in love with a China that possessed unique attributes and had enjoyed a historic rise in living standards. It took time for this vision to dislodge. When the idea of an invincible China did take a fall last year, it did so with a vengeance.

A recent statistical anecdote about Germany and Japan is revealing of the current mood. When Tokyo first reported GDP numbers for the fourth quarter of 2023, the data showed not only that Japan slipped into a recession, subsequently revised away, but that the country had ceded the No. 3 place in the world economic league to Germany. The change rated a perfunctory mention in many news stories, probably because nobody is impressed by the current form of Europe's commercial power. Germany has experienced pretty stagnant growth lately.

Compare that with the fanfare when China pulled in front of Japan in 2010 to claim the mantle of second place behind the US. The switch was seen as the culmination of tectonic forces inexorably pushing China forward. Surely, it was a matter of time before America lost the mantle. Yet, problems were brewing. In Bloomberg's news story on the eclipse of Japan, Kenneth Rogoff, a Harvard University professor, presciently warned of a Chinese property collapse. Deflation dogs China.