The Japanese economy decelerated sharply in the 197os and 1980s when growth in its working-age population slowed and growth in investment spending downshifted. The Japanese economy started to stagnate in the 1990s when capital was misallocated to “zombie” companies.
The underlying drivers of long-run economic growth in China are no longer supportive of the supercharged rates of real GDP growth that the country achieved during the past few decades. The working-age population has already peaked, and investment spending has decelerated. Because China is not yet as economically developed as Japan was when that country experienced its growth slowdown starting in the 1970s, China should be able to shore up its productivity growth rate by continuing to adopt technologies that have been developed in more advanced economies.
We would not characterize the 6 percent per annum growth rates that many analysts forecast for Chinese real GDP growth in the 2017-2020 period as a “lost decade.” But China could make the same mistake as Japan did in the 1990s when capital in that country was misallocated. There are some large state-owned enterprises in China, and the Chinese government could make a policy decision to keep these economically inefficient firms afloat to avoid mass layoffs. If capital becomes increasingly misallocated in China, the country could eventually face its own lost decade.
Read the complete commentary here: china and japan-20160315