The economic situation experienced by China and Japan has disrupted what was until now considered normal on the markets. Japan has been the model of deflation since the 1990s, while China is the model of accelerated growth, with relatively stable inflation during the first decades of the 20th century. However, things have turned around in recent years: the real estate crisis in China and the slowdown in the country’s activity, combined with a demographic that increasingly resembles that of Japan, threaten to make the country succumb to decades of deflation, a spiral from which the Japanese country is gradually emerging .
At the same time, Japan in recent years reached inflation rates seen since the 1980s and began raising interest rates, something that had not happened in 17 years. All this ended up leading the Chinese bond with a maturity of 30 years to exceed, this Friday, the profitability offered by its Japanese counterpart, which had never happened before and which confirms the markets’ fears as to the possibility let China follow suit. the footsteps of its Asian rival in the years to come.
The usual gap between Chinese and Japanese bond yields has narrowed in recent years. Securities with a maturity of 30 years were trading in 2018 with an actuarial yield of 4.4% in China, while the Japanese benchmark index moved at 0.8%. After Covid, something began to change: the real estate crisis in China infected the country’s economic activity and the first fears of Japaneseization appeared. Chinese activity is slowing, as is its inflation, with a complicated long-term outlook for Beijing, which is also beginning to suffer from the scourge of its aging population.
All this led the Chinese bond to reduce its yield at maturity, to the point that it crossed this Friday with its Japanese counterpart. For the first time in history, Japanese 30-year debt now offers higher profitability in local currency than that of China, with 2.29% for the former, compared to 2.2% offered by Beijing.
This turnaround has been confirmed by the positive trend experienced by the Japanese economy, as the country begins to emerge from the deflationary trap into which it fell three decades ago. Inflation is starting to accelerate and is already leaving behind the decades in which it was difficult to exceed the 0% level.. The latest data indicates annual growth of 2.3%, well above the 0.3% currently experienced by Chinese inflation.
Signs of Japaneseization
“The example of Japan, which experienced chronic deflation in the 1990s followed by many years of slow growth, illustrates the difficulty and time required to reverse a deflationary mechanism,” explains Nicolas Bickel, head of investments at Edmond De Rothschild Private Banking.
At the same time, Vladimir Oleinikov, senior quantitative analyst at CFA and Christoph Siepmann, senior economist at Generali Investments, highlight how “markets have recently been spooked by the similarities between the Chinese and Japanese economies around the bursting of bubbles stock market and real estate. ” in 1990. The implosion of these bubbles led Japan into the “lost” decades, a fate that China (Japanization) could repeat.” Experts point out several similarities: “pressures on real estate markets; increasing private debt in China”, which already exceeds the levels reached by Japan in the 1990s, “falling inflation in China; demographics and expansionist policies”, which ended up generating bubbles in Japan.
Today, China is launching a constant battery of stimulus measures to try to revive the economy, a practice that was also implemented by Japan and which ended with the bursting of the financial and real estate bubble in early 1990s. However, some analysts question this policy. the effectiveness of the measures adopted so far and believe that the Chinese government will have to redouble its efforts to achieve its objectives. For them, it is a question of not sinking into the abyss into which Japan fell and from which it took 30 years to emerge.
