China – Japanification scorecard: part 1

Paul Cavey -

With interest rates in China dropping below Japan’s, it has become popular to argue that China is falling into the economic malaise that Japan suffered for 30 years.

But I don’t think China is suffering from “Japanification”. I say that using the BOJ’s recent detailed report looking at Japan’s experience. With that, we effectively have a checklist for the causes of Japanification. Using that to benchmark events today, and I think China is only scoring 30%.

The BOJ identifies 15 factors behind Japan’s malaise, which it groups into three buckets. The first two are easy to understand: factors that affect demand, and those that impact supply. The third is less neat, being the ingredients behind the "deflationary mindset", a phenomenon that meant once deflation started, it became very difficult to end.

In this first video, I go through the seven demand-side factors. China is ticking some of these boxes, but not all of them, and there are only two where the parallels are particularly strong. In the next video, I go through the second and third buckets, which is where the differentiation with China today is even bigger.

This framework gives me more conviction to argue that China isn’t likely to be following the same path that Japan followed. That has direct relevance for investors. As an example, if China is different from Japan, then it is highly likely that the recent drop in interest rates in China has gone far enough.

Chapters:

  • 0:00 - Introduction to Japanification
  • 0:31 - Yields as Warning Signs. Falling Chinese bond yields (1.5-1.6%) spark comparisons to Japan’s zero-rate era.
  • 1:30 - Japan’s Stagnation vs. China’s Future. How Japan’s post-1989 malaise raises questions about China’s trajectory.
  • 2:19 - The Analyst Divide. Why few experts bridge Japan and China, complicating the Japanification debate.
  • 3:57 - Bank of Japan’s Checklist. Using the BOJ’s report to score China’s Japanification risk, starting with demand.
  • 5:37 - Demand-Side Breakdown. Introducing 7 demand-side factors to compare China and Japan.
  • 7:22 - 1. Asset Markets Collapse. China’s property crash mirrors Japan’s bubble burst in impact.
  • 9:28 - 2. Financial System Instability. Bank pressures exist in China, but lending hasn’t tightened like Japan’s did.
  • 11:56 - 3. Firms Stop Investing. Real estate credit crunched, but manufacturing investment surges in China.
  • 14:15 - 4. Companies Become Savers. Unlike Japan, China’s firms keep borrowing, not saving.
  • 15:38 - 5. Productivity Declines. China’s R&D and investment defy Japan’s productivity slump.
  • 18:07 - 6. Slow to Adapt to Globalization/IT. China thrives in tech and exports, unlike Japan’s 1990s lag.
  • 19:44 - 7. Demographics (2/2). China’s aging crisis echoes—and may exceed—Japan’s.
  • 21:19 - Summary: Demand Score. China scores 6/14 on demand-side Japanification risks.
  • 22:15 - Next Up: Supply Side. Teaser for the next video on supply-side and idiosyncratic factors.