In 1990, when the Japanese foam burst, the house prices in Tokyo fell from the ceiling to the ground, and the stock market fell half paralyzed. In the following thirty years, Japanese people crazily saved money, companies risked their lives to repay debts, and the economy was like being choked and remained half dead.

To save the economy, the Japanese government has continuously sent loose gift packages, including but not limited to:

As soon as the bank interest rate dropped to the bottom, the government directly bought treasury bond to inject liquidity into the market. At the same time, it borrowed money for infrastructure construction to stimulate the domestic consumer market.

The logic of these policies is very straightforward. Interest rate cuts and water releases can allow banks to lend money out, and companies are willing to invest and expand production if they borrow money cheaply. As a result, there are more job opportunities for the people and they have the ability to consume, and the Japanese economy has come back to life.

But decades have passed, and Japan remains stagnant, with sluggish consumption, weak domestic demand, a snowball of debt, and long-term economic growth hovering around 1%.

In the past two years, we have also empathized, especially with a series of policies being introduced intensively, which easily reminds people of Japan’s lost thirty years.

So the question arises, why doesn’t printing money work in Japan? Will we also fall into a vicious cycle where printing money is ineffective? Will China repeat Japan’s mistakes?

01

The first question is, why doesn’t printing money work anymore?

To understand why printing money doesn’t work, we need to first clarify the logic behind printing money?

You should know that printing money is not about putting money directly into the pockets of ordinary people, but about lowering interest rates and increasing credit limits to allow banks to release the money.

Enterprises can invest and expand production with the money they receive, creating more job opportunities and increasing the income of ordinary people. Bold consumption can also feedback to the enterprise, forming a virtuous economic cycle.

But the premise of this logic is that money needs to flow.

In the early 1990s, in response to economic contraction, the Japanese government’s monetary policy firepower was fully unleashed.

The first move is to significantly reduce bank interest rates, with the benchmark interest rate plummeting from 6% in 1990 to 0.5% in 1995, basically like giving away money.

The second move is to buy bonds and release water. The central bank directly buys treasury bond and started quantitative easing in 2001, injecting excess liquidity into the market.

The last resort was for the government to borrow money for infrastructure construction, and the scale of borrowing skyrocketed from 60% of GDP to 130% in 2000, with a large amount of funds flowing into the infrastructure package.

In theory, if such a monetary policy is implemented, the market will improve to some extent, but after ten years, the Japanese economy will still be in the same state of decline because money has been invested but has not flowed to where it should go.

Everyone should know that the logic behind the government borrowing money for infrastructure construction is to reduce logistics costs, improve economic efficiency, and drive the development of related industries such as steel, cement, and machinery. Therefore, the larger the initial investment and projects, the more production and employment opportunities they will drive. When the economic plate becomes larger, the government can receive more taxes, and the money owed can always be repaid with interest.

But when it comes to logic, magical things happen in the specific operational stages.

For example, when the Japanese government built airports and highways in some remote towns in Hokkaido, the annual passenger flow was less than 10000 people, far below the minimum operating standards, making it a truly empty city airport.

There are also various high-speed railway stations in county towns that we built after 2008, with daily passenger flow of only a hundred. The income from ticket purchases is not enough to cover the expenses of station personnel, and many stations are in a long-term loss state.

In addition, after the foam burst, Japanese enterprises did not dare to expand, and ordinary people were also full of uncertainty about the future, so even if the interest rate was negative, everyone had to deposit money in the bank. It’s like the Bank of Japan printing a lot of money, but it’s all locked up in the financial system and government debt, like a bucket of water spilled on sand and instantly drained.

In fact, before 2018, we were constantly releasing funds and there was no such thing as printing money directly, but rather providing loans to enterprises and ordinary people.

The water release effect was good back then, because we had two key prerequisites.

Firstly, the overseas market is large enough that as long as the products produced can be sold, even if the profit is low and the competition is fierce, companies dare to borrow money to expand production.

Secondly, housing prices will always rise. Rich people will buy houses as long as they have some spare money, and ordinary people will also need to take out loans to buy them, because in just a few years, they can earn tens or even millions by reselling them, which is much happier than working or starting a business.

It is precisely because of these two prerequisites that no matter how much water the government releases, there will always be someone to take over the loan. Even if banks offer interest rates of 5% and private lending exceeds 10%, people still rush to borrow.

But since 2018, the method of releasing water to protect the economy has obviously become ineffective. Firstly, our land and labor costs are rising, and the growth space for exports is becoming smaller and smaller. Even without the US China trade war, the purchasing power of foreigners cannot support the continuous expansion of Chinese manufacturing.

In addition, the myth of forever rising housing prices has been shattered. Although interest rates keep falling, people still dare not take out loans to buy houses. After all, for most ordinary people, buying a house means carrying decades of debt. Once they cannot repay it, their life may be in vain.

So you will find that in recent years, M2 has been steadily increasing, but money is just idling in the system without anyone taking over. What’s more troublesome is that the profits of enterprises are getting thinner and the growth rate of total retail sales in society is also significantly declining.

Previously, those who used to drink Starbucks switched to Luckin Coffee, and those who drank Luckin Coffee turned to Meixue Ice City. Pinxi’s performance skyrocketed, and the automotive and home appliance industries became skeptical of life.

The current situation is that asset prices are all declining, even business owners are not borrowing money, and ordinary people are even more afraid to take out loans to buy houses. Not only do they not borrow, but they also repay the money. Everyone’s intuitive feeling is that it is becoming harder and harder to find a job, and their income may even decrease, so some idle money is all deposited in the bank.

It can be said that China is also facing similar problems as Japan. Enterprises dare not expand, banks cannot release money, people have a strong willingness to deposit, local debt is a bit large, and the return on investment of infrastructure is too low. In short, it is a spiral downward trend.

In economics, this phenomenon is called the “liquidity trap”, which means that water circulates in a pond without flowing into the fields. No matter how much water you put in, it will only make the rich hoard more assets, while the wallets of ordinary people cannot be inflated.

Simply put, if money cannot be converted into actual consumer demand, no matter how much you print, the effect is basically zero.

02

So the second question is, has Japan’s money printing industry escaped its economic difficulties?

You may have a misconception that although economic growth has been stagnant for a long time, the Japanese government has not done nothing, especially in the past decade, the Japanese government and central bank have repeatedly released money, almost reaching the limit of monetary easing.

In 2012, Shinzo Abe launched an economic revitalization plan centered around the “Three Arrows,” also known as “Abenomics,” which is essentially super quantitative easing.

The Bank of Japan buys 80 trillion treasury bond every year and directly monetizes treasury bond. In theory, it prints as much as it wants, and also reduces the interest rate below zero. Japan has entered the era of negative interest rates, that is, there is no interest on saving money, and it also has to give back subsidies to banks, which is tantamount to forcing people and enterprises to invest and consume.

The Japanese government has also set an annual inflation target of 2% and is driving up prices by issuing a large amount of currency. The government directly sends money, provides subsidies, offers child allowances to families, provides research and development funds to enterprises, and distributes tourism vouchers to the public.

In addition, there will be increased investment in new areas such as transportation networks and green energy, which will drive economic growth through infrastructure construction.

The recent large-scale water release in Japan has indeed brought some positive changes, but it has also planted many new hidden dangers.

In the first few years of implementing Abenomics, there was indeed a rebound in social consumption. The unemployment rate in Japan once dropped below 2%, and household spending also saw a slight increase.

But this rebound is very short-lived, because many people are worried that the economy will return to its former state of feigned death, so they still have a obsession with saving money and dare not spend it recklessly.

Although Japan’s stock and real estate markets have begun to rebound, housing prices in places such as Tokyo and Osaka have increased. But the effect of these asset appreciation is mainly reflected in the wealthy, and has not benefited ordinary families.

Data shows that although the implementation of Abenomics has led to an increase in Japan’s GDP growth rate, it still hovers around 1%, far below normal expectations. Especially after the epidemic, with a decline in exports and high inflation, Ampere’s monetary policy of extreme easing cannot continue.

The problem with Japan is that although the government has printed a lot of money, it has never been able to change the consumption concept of society.

The Japanese government has used cash and shopping vouchers to stimulate social consumption, but the effect was not ideal because Japanese people still prefer to save money or use it to repay debts. Their deposit rate remains above 20% throughout the year, and even approaches 30% in some years.

The essence of Japanese people saving money is still a lack of confidence in the future and dissatisfaction with the social security system.

Ampere’s water experiment tells us that printing money is effective, but it only treats the symptoms and not the root cause. Although enterprises have money, the income of ordinary people is not very obvious. In addition, the three core issues in the sterilization circle of East Asia, aging and unmarried infertility, have not been solved.

From 2013 to 2020, the Japanese government’s debt has reached over 130% of GDP, the highest limit among developed countries. So the printed growth is more like an economic cling film, which can prevent decay but cannot restore economic vitality.

The experience of Japan is very valuable for us to refer to.

03

A few years ago, we were also releasing water but still following the same path as before, hoping to expand production and provide more job opportunities through the supply side, that is, lending money to enterprises, and ultimately indirectly stimulate the consumer market.

The fact proves that the effect is not very good.

The 12.9 New Deal announced that the monetary policy for 2025 will be adjusted to “moderately loose”, which is the first time in 14 years that the monetary policy will be loosened. The logic behind it is to boost domestic demand and stabilize growth through lower interest rates and a wider financing environment.

At the same time, there is a package of plans, including supporting local governments to resolve implicit debts, allowing banks to expand capital, and stabilizing the real estate and stock markets.

Many people may have a question, these loose policies do seem a bit familiar, will we Japanize them? Can the new policy avoid Japan’s liquidity trap?

Objectively speaking, if we only look at these measures, it is easy to associate them with Japan’s loose road back then, but upon closer examination, we can find that the policy design this time is still quite different from Japan’s.

Firstly, it is consumption oriented.

In the past, Japan’s loose policies were mainly achieved through the supply side (which is also true for us), that is, giving money to enterprises to expand production and provide job opportunities. However, the result was that funds were idle in the system, and ordinary people did not benefit much in practice.

And this time we emphasize more on supporting ordinary people, such as consumer vouchers and car purchase subsidies directly targeting families, allowing money to flow from the bottom, and the logic of releasing water has undergone a significant change.

In addition, investing in infrastructure is no longer just about repairing bridges and paving roads, but more inclined towards emerging fields. For example, new energy, digital economy, and green transportation can not only absorb employment, but also lay the foundation for future economic growth.

Lastly and most importantly, we have strong execution capabilities. For example, within just two weeks of the introduction of the housing loan adjustment policy, major banks have completed the bulk adjustment of existing housing loan interest rates. This ability to respond quickly is unmatched by its Japanese counterparts.

It can be said that China’s loose combination of punches is aimed at the core pain points of Japan’s policies at that time, emphasizing precision and effectiveness. However, it should be noted that the key to avoiding Japanization is not how much money is printed, but whether the policies can touch on several core issues that ordinary people are concerned about.

A while ago, Ren Zeping suggested providing high subsidies for childbirth and directly giving money to families with children. Families with one child would receive 1000 yuan, families with two children would receive 3000 yuan, and families with three children would receive up to 6000 yuan. Many people thought this guy was crazy, but now looking back, what he said is not wrong at all.

The core of consumer confidence lies in a sense of security. If ordinary people don’t have to worry about major issues such as education, healthcare, and elderly care, they would definitely prefer to consume rather than save money.

In the eyes of enterprises, loans are important, but a stable market environment is even more important.

The new policy supports technological innovation and promotes industrial upgrading, allowing more funds to flow into the real economy instead of running idle in the real estate and financial systems. This is also the key to breaking through investment bottlenecks.

Finally, there is the issue of local debt. In the past, it relied on real estate, and as long as developers could acquire land at a high price, theoretically, the government would be able to repay the money owed. But this gameplay is definitely not working now. In the future, we can only find ways to increase the return on investment of infrastructure projects, and we can no longer engage in face saving projects that buy burdens with money.

The lesson from Japan tells us that relying solely on “printing money” and easing policies cannot solve structural problems. But China has a huge market, strong policy execution, and clear consumer orientation, and is capable of finding another path.

Can we avoid the Japanese trap? The answer may be hidden in every spending voucher.

Whether ordinary people dare to spend money or not depends on their expectations for the future. If the education, healthcare, and elderly care issues that everyone is concerned about can be resolved, then consumption will drive investment and the economy can start running again.

Japan’s experience tells us that domestic demand is the foundation of economic growth, and confidence is the key to activating domestic demand.

Our current policy adjustments, from consumption to investment, from infrastructure to industry, are all seeking more precise and effective ways of operation, with the aim of avoiding Japanization as much as possible.

Of course, the future economy may not be achieved overnight, but as long as we find the right direction, we can definitely avoid the trap of Japanization.

For most people, confidence is the most important thing.