• JPMorgan strategists warned that China could turn into the Japan of the 1990s unless it addresses specific economic challenges.
• China has a rapidly aging population and a difficult macro environment, but it also has some strong points. 
• Beijing must stabilize its housing market to avoid the same pitfalls Japan faced decades prior.

China could soon resemble the slow-growth, financially-stagnating Japan of the 1990s if it doesn’t address its economic challenges soon, according to JPMorgan. 

Strategists warned Wednesday of the superpower’s “Japanification” risk that could stem from an unsteady housing market, financial imbalance, and an aging population.

The comparison comes from the early 1990s, when Japan endured a spell of weak economic growth, low inflation, a broad decline in asset prices, and a “balance sheet recession.”

China today presents certain similarities, according to JPMorgan. Its housing sector has corrected since 2021 structurally and cyclically, the strategists said, reflecting changing supply and demand dynamics — which Japan also faced during its housing correction three decades ago.

“An alarming signal is that secondary home prices have started to fall again in some cities in recent months, after a tentative recovery in 1Q23,” the bank said. “If secondary home prices fall below new home prices, it could be a game-changer in that a mutually reinforcing decline in new home prices and secondary home prices may be formed, intensifying both macro and financial risks. Hence, it is critical to stabilize the housing market as a near-term policy priority, as emphasized by the July Politburo meeting.”

China’s aging population, too, remains a concern. In 2019, the country had 12.6% of its population aged 65 or older, right in line with 1991 Japan’s 12.7%.

But China’s demographics are actually worse, given that its population aging is happening at a steeper rate.

The strategists also highlighted that China’s GDP per capita — $12,800 in 2022 — is much lower than Japan’s $29,470 from 1991. While this can imply more potential for growth, it also indicates the country is on pace to get older and more indebted before it gets rich, in JPMorgan’s view.

What’s more, China is staring down a more complex trade battle with the US than Japan did decades ago, which could impede economic growth. Plus, the Russia-Ukraine war ramped up the global supply chain relocation, which doesn’t help China either.

It’s worth noting that China has much less flexibility for policy and fiscal stimulus than what Japan saw. China’s public debt reached 95% of GDP in 2022, while Japan’s started at 61.9% in 1991 before climbing to 131% by 2000.

To be sure, China still has some factors working in its favor, including its comparably lower urbanization rate, which suggests a larger potential for productivity increases and room for more housing demand. And the Chinese housing sector, for all its uncertainty, doesn’t look as overvalued as Japan’s once was, according to JPMorgan.

Other benefits include China’s far larger domestic market, more STEM graduates, and a more robust manufacturing sector. 

“While China may be facing a more challenging external environment than Japan in the 1990s, there is also hope that China can achieve technology upgrade and commercialization in some areas,” strategists said. “For instance, China has become a leading player in new energy and new energy vehicles in recent years.”

Notably, because the Chinese government imposes strong capital controls, there’s a smaller change of a “sudden-stop debt crisis,” albeit with a risk of zombie parts of the economy staying afloat longer than they should. 

Ultimately, much of the potential “Japanification” falls back to housing market risks.

“Although balance sheet recession is not a real risk now, the future depends on whether policymakers can continue to keep house prices relatively stable,” strategists said. “An important reason why the government is able to maintain relatively stable new home prices is because new home prices had been kept lower than secondary home prices in the past (due to a price cap for new home sales). The gap has narrowed in recent years as secondary home prices have declined more than new home prices (due to a price floor for new home sales).”