Our generation is quite used to associating Asian economic power with China whereas if you ask anyone what comes to your mind when you hear Japan? Almost everyone will instantly say “Anime”, that’s how we know Japan. But, that’s not how our parents perceived Japan when they were our age. Japan was the leading global economic power second only to the U.S.A. from the late 1960s till 2010 whereas China’s economy was an infant when compared to Japan. So what exactly happened?
JAPAN: BACKGROUND
It all began with Plaza Accord, so what was Plaza Accord? Plaza Accord was an agreement signed in 1985 by the then five major economies -the U.S.A., the UK, Japan, West Germany, and Japan. Its main purpose was to correct the trade imbalance between the trade deficit countries like the U.S.A and the countries with trade surplus like Japan and West Germany.
In what ways did it impact Japan? The devaluation of the U.S. dollar led the Japanese yen to appreciate rapidly, making Japanese exports less competitive. However, Japanese consumers saw their relative wealth skyrocket owing to cheaper imports. And, to counter some of that upward pressure on the Yen, the Bank of Japan lowered interest rates even further which was already low since 1979 after the second oil crisis caused by the Iranian revolution. This led to the creation of an economic bubble which ultimately popped and deflation followed because of massive debt of the population. Soon, the economy which was thriving earlier found itself struggling for inflation.
CHINA: BACKGROUND
In the 1970s there was something strange going on in China, there was a major shift taking place in the Chinese economy in this time period, under the guidance of Deng Xiaoping who opened the Chinese economy to the world. China normalized its relation with the U.S.A in 1972 which paved its way for western market and foreign investment and technology.
Deng Xiaoping tried to reform four major sectors of the Chinese economy which came to be known as the Four Modernizations which included agriculture, military, industry and science and technology.The main aim of these reforms was to increase productivity through technological innovation.
These economic reforms gradually lead to the privatization of agriculture and industries in China. Unlike the USSR, China did not go for shock therapy, rather liberalized the economy step-by-step which provided stability in the region. The privatization and liberalization of the economy increased the flow of FDI in the country which helped the country turn into the world’s factory.
During this period (1980s) China also came up with something called Special Economic Zones (SEZs). In places like Shenzhen, the Chinese government provided tax advantages, land permissions, and other incentives to attract manufacturing investments.This slow and careful planning by the CCP helped China become what we know today
PLAZA ACCORD AND CHINA
Is there any correlation between the Plaza Accord and the Chinese economy? With stronger yen many Japanese companies shifted their production base abroad. China, with cheap labor and an open economy, became a popular destination for Japanese investors. Many American and European companies also relocated their production base to China. Hence, it was able to capture a big part of the Western market which was earlier dominated by Japanese goods.
CHINA AND WTO
China joined the World Trade Organization (WTO) in 2001, which has benefited its economy in a number of ways as there has been remarkable economic growth, with its GDP growing at a rate of approx. 10% annually in the first decade of 21st century. has significantly increased China’s exports, and FDI, and provided jobs to millions. This resulted in liftingmillions of people out of poverty.
JAPAN AND INFLATION
The Japanese economy in the 1990s and 2000s was characterized by deflation, a state in which the prices of goods and wages of employees continue to fall because of low demand in the market. The fall in prices of commodities led the consumers to delay the purchase hence, leading to even lower demand and more fall in prices, in extreme scenarios it causes the loss of jobs of masses, which eventually leads to depression. So we can see how it acts as a vicious cycle in the economy. To get out of this, Bank of Japan took the following measures:
- Monetary policy: The Bank of Japan reduced interest rate to net zero and adopted the policy of “Quantitative Easing”.The main purpose of this was to increase lending, leading to increased liquidity in the system, and stimulating economic growth. However,the unwillingness and deflationary mindset of both customers and businesses led to no change even after cheap credit.
- Fiscal Policy: The government of Japan also tried to stimulate the economy by increasing government spending. Although it caused some short-term boost, it was rather insignificant as a whole. Also, heavy reliance on government spending contributed to growing national debt.
Abenomics
It refers to measures taken during the tenure of Shinzo Abe to bring back inflation in the Japanese economy. Here, the central bank aggressively doubled the monetary base and bought large parts of government bonds and assets to inject liquidity in the market. The government focused on infrastructure development and other projects to create demands and jobs in the economy. Japan also focused on long term structural reforms like encouraging innovation and deregulation of key industries.
Abenomics has caused a significant shift in Japan’s economic approach. It was able to depreciate yen, hence making Japanese exports more competitive but its impact was more modest because of issues like low working population and low productivity growth.
DEMOGRAPHIC STRUCTURE
There was also a major difference between the demographics of the two countries. Japan had a relatively old population and was facing a population decline. On the other hand, China had a large, young and poor population which provided cheap labor to the industries and the population being young meant that they were ready to adopt new technology which was not the case with Japan.
2008 FINANCIAL CRISIS
Though China was initially hit hard by recession, being an export oriented economy but due to government intervention it recovered quickly, it also led the country to a shift towards investment driven growth and domestic consumption. While China came out fine, things are not the same for our other Asian friends. Japan was already struggling with deflation and stagnation, the crisis pushed it into a deeper recession. The government tried supporting financially struggling companies but it led to an increase in Japan’s already high national debt. Overall, China came out of the crisis with an economic strategy which led to significant growth. Japan continued to face deflation.
All these factors led the dragon to replace Japan as the second largest economy and become the face value of Asia’s economic giant. Now, is the shift in economic power only limited to the economy or is there any political impact of this? Well the answer is that this change is not only limited to economics but instead :-
- It has changed the geopolitical structure of the world, now China enjoys more global recognition and can be more assertive in its various policies.Chinese loans are a big thing in underdeveloped and developing countries and it secures them some votes in the UN general assembly.
- China’s belt and road initiative showcases Chinese influence through infrastructure and economic investment.
- China’s growth has sincerely impacted its relation with the U.S.A, the two countries have grown apart with the U.Sch-China trade war of 2019 being a prime example. But it is not only limited to trade as we have seen with the frequency of attacks on Chinese American leading to the “Stop Asian Hate” movement especially during the tenure of the Republic Party.
- With the rise of China, Japan under Shinzo Abe took the initiative to develop “Quad” with the U.S.A, India and Australia. The group serves as a counterbalance for China’s influence in the region.
Conclusion
Here, we discussed how factors like Chinese state-based planning, demographic structure and Japanese economic stagnation and deflation caused the economic power shift in Asia from Japan to China.This shift has altered the power structure in the global arena and has reshaped the economic structure of Asia. Even though Japan has lost its earlier position, it continues to be the second largest economy in Asia and fourth largest in the world. Overall the quality of life in Japan is still way high when compared to other nations. Through this project we were able to get to know how important strategic planning and youth participation is for economic growth. These lessons serve as a good case-based example for policymakers, scholars and businesses to understand the global economy in the 21st century
References
Money and Macro: The economy of Japan: How a superpower felt from grace in four decades.
Harvard Business School: The Plaza Accord, 30 years later.
Encyclopaedia Britannica: Economic Reform, Industrialization and Urbanization in China.
World Trade Organization: China’s Accession to the WTO and Its Impact on the Global economy.