Lessons from the Japanese Stagnation: How China will Tackle the Economic Slowdown?

The Shared Experience
Both Japan’s post-World War II recovery and China’s resurgence over the last three decades were export-driven. Manufacturing, based on low-cost labour, was the key determinant of the initial transformation process in both instances. Both countries also used under-valued currencies to provide exporters with the competitive advantage. Japan and China promoted exports at the expense of domestic demand (household income and consumption). Both countries were able to attain very high levels of domestically financed investment. Both generated extremely large trade surpluses which were invested abroad, particularly in US securities. This enabled them to achieve the twin objectives of avoiding upward pressure on their exchange rates and of helping the US and others to purchase their exports.