Japan Is a Preview of Chinas Ugly Recession, Stock Market Crash – Business Insider

Japan\'s long-comatose economy is finally showing proof of life.After a catastrophic real-estate implosion in the early 1990s, the country\'s economy spent the next three decades shrinking. Households and businesses had to spend their money paying off debt, which prevented them from investing or starting new ventures. Wages were stagnant. And the economy slid from the world\'s second largest to its fourth. Animal spirits were neutered.Eight years ago, policymakers tried to bring them back by taking interest rates into negative territory. For a while, it was slow going. But Japan\'s economy — the long-unconscious patient — recently started to wiggle its toe. Japan\'s labor unions in March scored the biggest wage increase for workers in decades. The country\'s stock market is ripping; the Nikkei recently exceeded the all-time highs it set 34 years ago. Analysts at Goldman Sachs are telling clients there\'s still more upside to be had as corporate-governance reforms and a new era of sustainable inflation take hold. The Bank of Japan this month hiked interest rates above zero for the first time since 2007, a sign of confidence in the country\'s recovery.AdvertisementThis bounce back has led to some mild cheering in the US, mostly confined to Wall Street backslaps and calls of "great quarter, guys" as East Asia portfolios grow. But in China, the reemergence of Japan from this extended malaise is being watched with close concern.Like Japan in the 1990s, China is now staring down a property-market collapse. Real estate once accounted for 20% to 30% of the country\'s GDP, and all aspects of China\'s economy — local governments, households, the banking system — depend on money from the property market to survive. After decades of overbuilding and speculation, this massive debt pile is coming due. This is what we now recognize as a "balance-sheet recession," a term the Nomura economist Richard Koo coined in 1997 to describe Japan\'s economic sluggishness as

society paid down debt from its property-market collapse. Now, Koo says, Chinese academics and policymakers are flocking to Japan to glean some kind of wisdom from the country\'s experience."I tell them there\'s a big difference between Japan 30 years ago and China now. When we got into this balance-sheet recession, no one knew what kind of disease we contracted," Koo told me. "We were all lost for a long time."At a glance, the encouraging news from Tokyo should give Beijing hope. It shows that where there is a will, in even the direst economic circumstances, there is a way. But a

closer look at the road Japan took to revive its economy darkens the picture. Japan\'s recent success stems from a decadeslong effort from policymakers, careful negotiations with its trading partners, and the strange conditions Japan\'s economy found itself in along the way. All of this will be nearly impossible for Beijing to re-create — at least, not without pissing off policymakers from Brussels to Brasília.What happened in JapanThe difficulty of digging out of a crisis like Japan\'s is that the factors that contributed to the downturn are self-reinforcing. When real-estate values collapsed, Japanese households saw their wealth take a nosedive, which pushed them to save more and focus on paying down debt. With fewer consumers going out and spending, companies slashed prices to woo what few yen were going around, which led to economywide deflation. This has the perverse incentive of making saving seem more attractive: Why invest in something or buy something now when it may be cheaper in a year or two? Corporations had to stay innovative, pay down debt, and fight for consumer dollars all at once, but those tight margins meant there was little room for worker raises — further constraining what households had to spend. The whole economy seemed stuck in a trap.What\'s being said outside Japan and how it feels inside are very different.Eventually, the Japanese government and the Bank of Japan ramped up their efforts to kick-start the economy. The bank cut interest rates into negative territory, effectively forcing people to pay money to keep cash in their savings. And Shinzo Abe, Japan\'s former prime minister, launched a campaign of "Abenomics" that included massive stimulus packages designed to inspire business and household spending. After all this hard work, Japan is starting to show signs that better days are ahead. Koo says executive culture is shifting toward more of an appetite for debt — more risk — and that means more investment in new projects. He compared the C-suite\'s caution to the skepticism Americans who lived through the Great Depression in the 1930s felt toward debt — a form of PTSD. But, slowly, things are changing."I think it\'s a good sign," Koo told me, "but Japanese are very cautious people, especially compared to the US."One reason animal spirits are stirring in Japan is that the yen has been getting crushed against other major currencies