A worker in a factory utilizing advanced robotics, epitomizing China’s efforts to accelerate industrial innovation Photo: IC PHOTO

As the world’s second largest economy, China’s development trend has attracted widespread attention. Amid the complex domestic and international circumstances in recent years, the Chinese economy has been subject to multiple challenges and pressures. Some observers believe that China’s weak consumption and lower price levels signal the onset of long-term deflation, similar to Japan’s experience in the 1990s. However, a comparison between contemporary China and Japan in the 1990s reveals that China does not exhibit the typical characteristics of Japan’s deflationary period. Prices in China are still fluctuating within a reasonable range and trending positively. With a solid economic foundation and ample policy flexibility, China is well-positioned to avoid long-term deflation, giving it confidence in sustaining economic operations. Its economy will continue to demonstrate new vigor, and high-quality development remains attainable.

Price fluctuations within a reasonable range

In economic terms, deflation refers to a sustained decline in the overall price level, often accompanied by a contraction in the money supply alongside an economic recession. From a global history perspective, Japan’s prolonged deflation since the late 1990s was marked by distinct characteristics and a profound, extensive negative impact. Some believe that the shrinking growth rate of China’s consumer price index (CPI), declining national producer prices for industrial products (or producer price index, PPI), and falling prices in recent years suggest a tendency toward Japan-style long-term deflation. However, a comparative analysis confirms that China’s prices remain fluctuating within a reasonable range without falling into deflation.

In March 2001, the Japanese Cabinet Office acknowledged for the first time in its monthly economic report that the Japanese economy had fallen into a state of slow deflation. In fact, since the bursting of its economic bubble in the early 1990s, Japan had increasingly exhibited prominent deflationary trends. First, data shows that the growth rates of both the overall CPI and core CPI excluding fresh food prices in Japan declined annually between 1991 and 1995, until the overall CPI plummeted to below zero and the core CPI dropped to zero in 1995. Even after this point, both remained at or below zero for an extended period. Since price changes spread from PPI to CPI, Japan’s PPI contracted throughout most of the 1990s. In addition, deflation in Japan was accompanied by a shrinking money supply and a sluggish economy. Data indicates that Japan’s broad money supply (M2) grew at an average annual rate of just 2.1% in 2000, a rate that further dropped to approximately 1.5% between 2004 and 2007, while the nation’s money supply growth slowed significantly. Moreover, Japan’s real gross domestic product (GDP) reported negative growth for the first time in 1993, and the 1997 Asian financial crisis further exacerbated the economic depression. From 1993 to 2000, Japan’s economic growth remained sluggish, with an average annual real GDP growth rate of only 1.1%.

China’s current situation contrasts sharply with Japan’s during that period, particularly in two key areas. First, China has not experienced a long-term downward trend in prices. In 2023, China’s overall CPI and core CPI excluding food and energy prices rose by 0.2% and 0.7% respectively over the previous year. From January to September 2024, China’s CPI reported a 0.3% year-on-year growth rate, with a larger cumulative increase compared with that of the same period the previous year. While China’s PPI growth turned negative for the first time in October 2022 due to factors such as the US interest rate hike, it bottomed out and began rebounding after June 2023, showing an upward trend with narrowing declines. In addition, China does not exhibit certain of the typical characteristics of Japan’s deflation period. China’s money and credit scale has maintained steady growth, with M2 reporting year-on-year growth rates of 11.8% and 9.7% at the end of 2022 and 2023, respectively. The cumulative increase in social financing in 2023 was 35.59 trillion yuan, an increase of 3.41 trillion yuan over the previous year. At the same time, the Chinese economy has shown strong resilience. In 2023, China’s GDP growth rate rose by 2.2 percentage points from 2022. In the first two quarters of 2024, China’s GDP reported a year-on-year growth rate of 5%, with the economy continuing to show an upward trend.

Promising prospects and great potential

Japan’s long-term deflation was triggered by a variety of supply- and demand-side factors. In contrast, China’s economic outlook is promising, supported by a vast market, an ever-optimizing industrial structure, and sufficient potential in domestic demand. These favorable conditions lay a solid economic foundation to stabilize expectations, promote growth, and avoid Japan-style long-term deflation.

First, China’s investment structure is undergoing continuous optimization, with accelerating industrial innovation and an advantage in supply underpinned by strong production capacity. Japan’s deflation in the late 1990s was partly due to insufficient domestic supply capacity and slow industrial innovation amid economic sluggishness. Over the past three decades, cost reduction has been the priority for the Japanese economy, which led to a vicious cycle of “cost-cutting economy.” Unlike Japan, China’s investment continues to grow steadily with a progressively optimized structure. Between 2013 and 2023, China’s total fixed asset investment reported an annual growth rate of 7% on average. In addition, China’s industrial structure is continuously being optimized and upgraded, with considerable room for further improvement. This process also requires ongoing optimization of the investment structure. Moreover, in recent years, China has been striving to become a leading country in science and technology, accelerating industrial innovation. According to the Global Innovation Index 2024, China’s global ranking has moved up to 11th place, and the country also leads the world with the most science and technology clusters among the world’s top 100. China’s industrial innovation capacity continues to strengthen, and its industrial system is increasingly capable of supporting the economy.

Second, China has sufficient domestic demand potential due to its super-large market. Japan’s private consumption was significantly suppressed after the 1990s, with its growth rate dropping from about 5% in 1990 to about 1% in 1999. In contrast, China’s current consumer market has maintained an overall growth trend, sufficient to effectively drive economic growth and avoid deflation. China’s urbanization rate has reached 66%, and its consumption rate now stands at about 55%, still lagging behind that of developed countries. This suggests that China has considerable untapped consumption potential. In addition, China’s consumer market is highly resilient, characterized by continuous structural optimization and upgrade and the emergence of new growth points. With a population exceeding 1.4 billion and a per capita GDP surpassing $12,000, the country’s per capita disposable income has increased year by year. The middle-income group is expanding, and residents’ consumption patterns are rapidly upgrading. At the same time, with the continuous improvement of the rural consumption environment as well as the integration of urban and rural consumer markets, China’s rural market has grown rapidly.

Leveraging policy to relieve deflationary pressure

At present, China has not entered a deflationary period, and the country maintains sufficient macroeconomic policy space to ease any potential deflationary pressure. First, there is substantial room for monetary policy easing, with promising policy innovation tools. Since Japan adopted a zero interest-rate policy in the late 1990s, it has continuously innovated with unconventional monetary policy tools and grown reliant on loose monetary policy. In contrast, China has more scope for further monetary easing, as well as cutting interest rates and the reserve requirement ratio, supported by promising policy innovation tools. Since 2024, China has strengthened its stance on supportive monetary policy, making several major adjustments. These include measures addressing total volume, price, and structure, maintaining reasonable and ample liquidity while effectively lowering social financing costs. This has boosted consumption and investment demand, and supported the economic recovery.

Second, China’s fiscal policy will continue to exert its impact, and its incremental measures will be promptly implemented. Japan also implemented expansionary fiscal policy as an important means to promote structural reforms and cope with long-term deflation. However, the frequent cabinet reshuffles disrupted the continuity of fiscal policy, and the intensification of government debt problems resulted in the government oscillating between promoting fiscal reconstruction and combatting deflation. China, on the other hand, is firmly implementing a proactive fiscal policy to help promote consumption and stabilize growth. In addition, China’s finances remain resilient enough to achieve fiscal balance through comprehensive measures. There is still room for the central government to increase debts and deficits to support more incremental measures. Strengthened fiscal policy will send more positive signals to the market, stimulating consumption and investment.

Third, policy coordination will simultaneously address short-term and medium- and long-term economic challenges. Japan’s experience demonstrates that unconventional monetary policy and fiscal stimulus policies may stabilize the economy in the short term, but are insufficient for addressing the inherent problems within the economic system. Measures to expand consumption should be grounded in structural reforms. China attaches great importance to improving the macroeconomic governance system, promoting policy coordination to accelerate structural reforms, and leveraging the advantages of the socialist market economy. Recently, China has introduced a raft of incremental policies, focusing on solving not only the prominent contradictions facing current economic operation, but also the structural problems affecting medium- and long-term economic development. This is both a positive response to current economic conditions and a strategic deployment for the healthy development of the economy in the long run.

In short, China is not trapped in deflation at present, and is fully capable of avoiding long-term Japan-style deflation. The current low prices in China are primarily the result of cyclical, phased, and seasonal factors, rather than trend-based. The narrowing of price increases is, to a greater extent, local and temporary. Looking ahead, China has both the confidence and the capacity to ensure the smooth operation of its economy, release consumption potential, effectively reduce the risk of vicious deflation or inflation, and promote high-quality economic development.

Yan Kun (research fellow) and Deng Meiwei (associate research fellow) are from the Institute of Japanese Studies at the Chinese Academy of Social Sciences.