“China must act to avoid crisis,” warns former Japanese central banker

China needs to take steps to avoid a similar fate to Japan, which suffered sharp drops in its GDP deflator and producer price index (PPI), former Bank of Japan governor Haruhiko Kuroda warned at the Bund Summit in Shanghai on Friday (6).

The warning came amid intense discussions among academics and experts about the potential “Japanization” of China, as the country faces a housing crisis, deflationary pressures and demographic challenges, reminiscent of Japan’s “lost decades.” Kuroda mentioned the deflation that affected Japan from 1998 to 2012, highlighting wage stagnation as the biggest challenge during that period. During his term, from 2013 to 2023, Japan implemented several rounds of quantitative easing and structural reforms, managing to break out of the deflationary spiral. However, Kuroda noted that deflation in China was “not as severe as that in Japan,” but stressed the importance of maintaining wage growth.

China’s PPI has been falling since October 2022, while the consumer price index (CPI), a key inflation indicator, entered contractionary territory between October 2023 and January. While the CPI is no longer falling, its growth remains weak, with an annual increase of just 0.5% recorded in July. China’s National Bureau of Statistics is due to release August figures on Monday.

At the same event, Yi Gang, a former governor of the People’s Bank of China, stressed the urgent need to combat deflation. “We should focus on combating deflationary pressure,” said Yi, who ends his term in July 2023. He added that the immediate priority is to make the GDP deflator positive in the short term, although some question that approach.

Despite signs of recovery, Yi noted that the world’s second-largest economy is still in a modest recovery. The Chinese government has acknowledged weak domestic demand and has implemented several initiatives to stimulate consumption, such as subsidies and exchange programs, but denies that deflation is a significant threat.

Yi noted that a number of price indicators have been in negative territory for several quarters, including the PPI, which fell for 22 consecutive months through July. He expressed hope that the index would stabilize at zero by the end of the year and that the GDP deflator would return to a “slightly positive” level.

Consumption in China has been slowing amid the economic slowdown, but the increase seen in July exceeded expectations, mainly due to changes in food prices. To address the situation, Yi called on the government to take measures to address unemployment, implement a proactive fiscal policy and maintain a supportive monetary policy.

“The key is to increase domestic demand, resolve the housing crisis, tackle the local government debt problem and restore society’s confidence,” Yi concluded.

Via News Agencies