IMF warning on China puts ‘Japanization’ risk in spotlight

MARRAKESH, Morocco, Oct. 13 (Reuters) – (This Oct. 13 story has been reedited to correct the spelling of Hiroshi Watanabe’s name in paragraph 1)

Hiroshi Watanabe, Japan’s former top currency diplomat, was keen to study how until around 2015 Chinese policymakers could avoid bursting a Japan-style asset bubble that led to a long period of deflation and economic stagnation. Reminisce about what you were doing.

“Then they stopped. They seem to have ignored everything they’ve learned over the past seven or eight years,” said Watanabe, who maintains close ties with incumbent policymakers. “Under Xi, China has probably shifted its focus away from the economy,” he told Reuters.

Now, China may be paying the price. The International Monetary Fund and World Bank meeting in Marrakech from October 9th to 15th identified stagnant inflation and a deepening real estate crisis as one of the biggest risks to global growth. Ta.

The world’s second-largest economy is attracting attention as a country on the brink of “Japanification,” which refers to Japan’s 15-year period of low growth and deflation after the collapse of the asset-inflating bubble in the late 1990s. .

Some Japanese policymakers have expressed concern that a prolonged recession in Japan, Japan’s largest trading partner, could deal a major blow to Japan’s export-dependent economy.

Asahi Noguchi, a board member of the Bank of Japan, said on Thursday, “What is rapidly emerging is the risk that China will fall into deflation, or in other words, the “Japanification” of the Chinese economy.”

“It is not yet clear whether China is headed for a situation similar to Japan,” he said in Japan. “However, the real estate sector, the backbone of the Chinese economy, is sluggish, youth unemployment is rising, and inflation is slowing. It is a fact that there is,” he said.

In its World Economic Outlook, the IMF lowered its forecast for China’s growth rate this year to 5.0% from 5.2% in April, warning that the crisis in the real estate sector could become even more serious with global repercussions. . It expects growth to slow to 4.2% next year.

Data on Friday showed China’s consumer inflation was flat in September, below the expected 0.2% rise, even as many other countries are grappling with the too-high inflation China is facing. This highlighted deflationary pressure.

Going back to the deflationary period from 1998 to 2013, core consumer prices in Japan fell by an average of 0.2% as low real estate prices hit bank balance sheets and dampened investment.

Certainly, there are differences between what is happening in China and Japan’s experience. First, China’s balance sheet stress and indebtedness are particularly confined to troubled developers and the local real estate sector.

This is in contrast to Japan, where banks across the country were saddled with huge amounts of non-performing loans due to slumping real estate prices, causing a widespread credit crunch and prolonging the economic slump.

IMF Asia and Pacific Director Krishna Srinivasan told a press conference on Friday that the IMF sees inflation accelerating on the back of demand recovery and does not see any significant risk of China slipping into deflation at this time.

But he called on the Chinese government to take steps to avoid the problem escalating, including helping struggling developers restructure and providing guidance to local provinces.

Asked about the possibility of “Japanification” in China, Srinivasan said: “Overall, I think China can avoid a long period of below-average growth with the right policies.”

“What we’re saying is it’s important to tackle this real estate crisis head on so it doesn’t become a bigger problem.”

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