The economic situation that China and Japan are experiencing has turned around what was considered normality in the markets to date. Japan has been the poster child for deflation since the 1990s, while China has been the poster child for accelerated growth, with relatively stable inflation in the early decades of the 20th century. However, the tables have turned in recent years: the real estate crisis in China and the slowdown in the country’s activity, together with a demographic that increasingly resembles that of Japan, threaten to make the country succumb to decades of deflation, a spiral from which the country is gradually emerging. Japanese country.
At the same time, Japan has in recent years reached the inflation rates seen since the 1980s, and has begun to raise interest rates, something that has not happened for 17 years. All this has ended up leading the Chinese bond with a 30-year maturity to surpass, this Friday, the profitability offered by its Japanese counterpart, something that had never happened before and that confirms the markets’ fears about the possibility that China will follow in the footsteps from its Asian rival in the coming years.
The usual distance between Chinese and Japanese bond yields has been narrowing in recent years. Securities maturing in 30 years were trading in 2018 with a yield to maturity of 4.4% in China, while the Japanese benchmark moved at 0.8%. After Covid, something began to change: China’s real estate crisis infected the country’s economic activity, and the first fears of Japanization arose. China’s activity is cooling, and so is its inflation, with complicated long-term prospects for Beijing, which is also beginning to suffer the curse of an aging population.
All this has 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, the 30-year Japanese debt now offers more profitability in local currency than that of China, with 2.29% for the former, compared to the 2.2% offered by Beijing.
The turnaround has been confirmed by the positive trend that the Japanese economy is experiencing, at a time when the country is beginning to emerge from the deflationary trap into which it fell 3 decades ago. Inflation is beginning to pick up, and is already leaving behind the decades in which it was difficult to beat the 0% level. The latest reading points to year-on-year growth of 2.3%, well above the 0.3% that Chinese inflation is currently suffering.
Signs of Japanization
“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 investment at Edmond De Rothschild Private Banking. .
At the same time, Vladimir Oleinikov, senior quantitative analyst 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 the stock and real estate bubbles.” in 1990. The implosion of these bubbles led Japan to the “lost” decades, a fate that China (Japanization) could repeat.” Experts highlight several similarities: “The pressures on real estate markets; the increase in private debt in China”, which already exceeds the levels that Japan reached in the 90s, “the fall in inflation in China; the demographics and expansive policies”, which ended up generating bubbles in Japan.
Today, China is launching constant batteries of stimuli to try to boost the economy, a practice that was also carried out by Japan and ended with the bursting of the financial and real estate bubble in the early 1990s. However, There are analysts who question the effectiveness of the measures adopted so far, and believe that the Chinese government will have to make greater efforts to achieve its objectives. It depends on them not sinking into the abyss into which Japan fell and from which it has taken 30 years to emerge.
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