China's Century or Its Lost Century? The Japan Analogy

Once the Rockefeller Center--and the future-were supposedly Japan's. Same with China?

I am old enough to remember the go-go days when Japan was the all-conquering hero of the world economy. Americans feared Japan buying it up. The epitome of this fear-mongering Stateside was Mitsubishi's purchase of the Rockefeller Center in 1989 for a then-astronomical sum...which preceded Japan entering its current stagnation by just a year as their stock market bubble burst. Fast-forward to today and many Asia-bashers are singing the same tune: China is not the next hegemon but rather the next Japan. (This is not a compliment.) Take it from one of those who are said to have predicted Japan's marginalization:

Forecasts for China to surpass the U.S. as the world’s main economic power are misplaced. So says an observer who foresaw Japan’s eventual demise a year before its land-price bubble began to burst. “The vulnerabilities in China today are very similar to the vulnerabilities in Japan,” said Roy Smith, 76, who was a Goldman Sachs Group Inc. partner when he wrote a column saying Japan’s rise as a financial hegemon was done. “Nobody agrees with me. But they didn’t agree with me in 1990, so at least I have one right.”

Among the risks: bad loans, overpriced stocks and a frothy property market are flashing danger for China’s economy and putting pressure on a fragile financial system -- similar to conditions that triggered Japan’s fall, said Smith, a finance professor at New York University’s Stern School of Business. A further parallel is the burden of an aging population, with mounting pension and health-care costs, he says. 

Will things be as bad an in Japan? Probably not Smith says, but it's going to be pretty awful nonetheless as the frailties of the PRC become brutally exposed:

While China probably will avoid prolonged Japan-style stagnation, a major crisis could expose weaknesses that aren’t apparent now, according to Smith. “Most people today are talking about China displacing the United States as the great power of the 21st century,” he said in a telephone interview last week. “My view is that it is more likely to end up like Japan -- that is, the status of a former would-be superpower that isn’t.”

Will lightning strike again?

The former Goldman Sachs executive doesn’t claim to have a flawless forecasting record or to have been the only one who tipped Japan’s economic decline.

Still, his October 1990 predictions on Japan proved prescient. Made amid a tumble in the stock market that year, they preceded the pricking of the country’s property bubble. In a column in the New York Times, he assessed that Japanese manufacturers would shift production abroad and that the nation’s banks would be impaired by losses on property loans.

“Japan’s extraordinary economic and financial success has carried the seeds of its own undoing, some of which have rooted and are now beginning to bloom,” Smith wrote at the time.

Interesting stuff. Actually, PRC leadership has the benefit of hindsight and still has room to maneuver to escape a similar fate, so it's not a cut-and-dried proposition. Yet.