Japonify: a new verb, created to describe what is currently happening in the world’s second-largest economy. And that’s not good news for Canada.
The Chinese economy is on the same trajectory as that of Japan in the 1990s, which led the country to stagnation and deflation, observe Desjardins economists in a recent study.1 This is what has been called in Japan the lost decade, which caused the country to lose its rank as the second largest economy in the world.
The evil, it seems, always begins in the same way: a real estate and financial bubble which swells and eventually bursts, which drags down the construction sector, the price of houses, the profitability of banks and which increases the unemployment rate.
This is the basic recipe that can paralyze an economy: consumers no longer consume, banks no longer take risks.
According to Desjardins economists, this engine failure is aggravated by the aging of the population and by the fact that China cannot count on the support of the United States, which had helped Japan at the time to navigate through crisis.
Unlike Japan, China must face a hostile trade climate and increasing tariff barriers. Its government is heavily in debt, which limits its power of intervention.
Japanification does not only threaten China. The United States narrowly escaped this in 2008-2009, explain Desjardins economists, mainly because the American government and the Federal Reserve intervened quickly to avoid the crisis of confidence.
In the case of China, even if the trajectory of the economy seems to follow that taken by Japan in the 1990s, Japanification remains prospective. Desjardins economists particularly emphasize the fact that the Chinese autocratic regime can impose radical and unpopular changes, which is not the case everywhere.
But if this scenario comes true, the sharp slowdown in the Chinese economy will affect the global economy. International financial markets, for example, could suffer repercussions. This is an important element of the equation that the Desjardins study does not cover.
Even if China’s manufacturing industry could hold up thanks to international demand, a collapse in domestic demand would depress the prices of energy and base metals that have been supported for years by China’s development.
If, for certain countries, a drop in the price of energy and raw materials would be beneficial, it would be a calamity for Canada, whose economy is very dependent on the exploitation of natural resources. Canada exports oil, iron, copper and other minerals whose prices are set on the international market.
If the value of these export products falls, business profitability, investment and hiring will suffer, predicts Desjardins. On the stock market, the value of companies will decline and the Canadian currency will depreciate.
China was, until recently, on an upward trajectory that saw it surpass the United States as the world’s largest economy in a few years. Recent signals from China are less optimistic. Growth is returning slowly and chaotically since the pandemic and the unemployment rate is rising, to the point where the government has stopped publishing statistics on high youth unemployment. Other scenarios now suggest another path, that of decline.
