Japan's So-Called Decline

In the early 1990s, Japan captured the American imagination, but its remarkable rise turned into a prolonged decline, mainly due to demography. Despite this challenge, Japan has managed to achieve significant growth in real income per capita. It has also maintained low unemployment rates, even in the face of weak population growth.

  • Contrary to the predicted debt crisis, Japan serves as a role model in managing a difficult demography while remaining prosperous and socially stable.
  • Moreover, Japanese society is more dynamic and culturally creative than often perceived.

Now, the focus has shifted to China, a bona fide economic superpower with concerns of following Japan's path.

China's Middle Income Trap?

As China faces an economic slowdown with an unbalanced economy and declining working-age population, the question arises: Can China replicate Japan's social cohesion in managing slower growth without mass suffering or instability? Despite being behind the technological frontier and having several venues for growth, concerns persist about China falling into the middle-income trap. Here are the challenges the country may need to overcome.

  1. First, the country's rapid economic growth over the past few decades has been heavily reliant on investments and exports. To move up the value chain and avoid stagnation, China needs to transition to a more innovation-driven and consumer-driven economy. However, this shift is easier said than done, as it requires significant structural reforms and overcoming resistance from vested interests.
  2. Secondly, China is grappling with a demographic challenge similar to what Japan experienced. The working-age population is declining, and the country is aging rapidly. This will strain the labor market, increase dependency ratios, and put pressure on social welfare systems. Such demographic shifts can hinder productivity growth and economic dynamism.
  3. Moreover, China's authoritarian regime, while having certain advantages in implementing policies quickly, might also lead to inefficiencies, corruption, and a lack of transparency. These factors could impede the necessary reforms and adjustments needed to navigate the middle-income trap successfully.
  4. Additionally, China's real estate sector has been a significant driver of economic growth, but it has also created a property bubble. If this bubble bursts, it could trigger a broader financial crisis with severe consequences for the overall economy.
  5. Lastly, China's rapid growth has led to environmental challenges, including pollution and resource depletion. Addressing these issues is critical to ensure sustainable and balanced development, but doing so may come at a cost to economic growth in the short term.

In conclusion, China is unlikely to follow Japan's economic path and might encounter even greater challenges in its pursuit of sustained growth and stability.

Benchmark's Take

Investing in China may not yield robust returns as the stock market might suffer from weak gains, similar to Japan's experience in the past.

  • China's economy faces challenges such as an unbalanced growth model, a declining working-age population, and the risk of falling into the middle-income trap.
  • These factors, coupled with uncertainties surrounding governance and potential market volatility, could hinder substantial investment gains in the long term.

Benchmark's Investing Ideas

In the following articles, we analyze stocks that demonstrate steady growth potential and reasonable valuation. Our focus is on stocks with strong balance sheets, emphasizing their capacity to sustain long-term growth.

Investing Idea #1
This is a global semiconductor company that develops, manufactures, and sells smart, connected, and secure embedded control solutions.


Please note that Benchmark does not produce investment advice in any form. Our articles are not research reports and are not intended to serve as the basis for any investment decision. All investments involve risk and the past performance of a security or financial product does not guarantee future returns. Investors have to conduct their own research before conducting any transaction. There is always the risk of losing parts or all of your money when you invest in securities or other financial products.


Photo by Edward He / Unsplash.