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Is China the Next Japan?

NEW HAVEN – Despite deepening concerns about China’s economy, the country is not heading toward “lost decades” of Japanese-style stagnation. And yet a worrisome ambiguity clouds this verdict. Japan’s fate was sealed by its reluctance to abandon a dysfunctional growth model. While China’s embrace of structural rebalancing distinguishes it from Japan, it is struggling to implement that strategy. Unless the struggle is won, the endgame could be similar.

The same conclusion emerges from a seminar on “The Lessons of Japan” that I have taught at Yale for the past six years. The course is primarily one in forensic macroeconomics – distilling key lessons from the rise and fall of the modern Japanese economy and then figuring out the relevance of those lessons for other major economies.

The seminar culminates with student research papers aimed at assessing which candidates might be the next Japan. As recently as 2012, the United States was the top choice, as it struggled to regain its footing in the aftermath of the Great Financial Crisis of 2008. Not surprisingly, by 2013, the focus had shifted to crisis-battered Europe. But this year, more than half of the students in the seminar (13 of 23) chose to examine whether China might be the next Japan.

An academic setting provides a wonderful intellectual laboratory. But a couple of quick trips to China after the end of the spring term gave me a different perspective. In extensive discussions with Chinese officials, business leaders, academics, and investors, I found great interest in the lessons of Japan and how they might bear on China’s conundrum.