The following adds to my earlier comments (blog entries of July 3rd and July 4th) about the Japanese and Chinese economies with respect to their similarities and differences. In particular, there is a specific reason that China is not anxious to allow its currency to appreciate too rapidly, based on a previous set of circumstances experienced by Japan.

Let’s quickly review some of Japan’s economic woes. Japan has labour market problems that centre on the country’s aging population. It is estimated that by 2030, the working-age population will decline by 20%. There will be only two workers per retired person. This potential problem is being made worse by official government policy that allows little immigration. Furthermore, the proportion of working women in Japan’s labor force is low by international standards.

Government debt in Japan (for reasons to be explained in tomorrow’s blog entry) is massive. The aging population is going to require more health care spending. This will add to the expenditure burdens of the public sector. It is not clear that government will be able to take on the necessary financial commitment.

At the corporate level, minor reforms have brought about some improvements in governance and financial reporting. For example, companies now are required to report subsidiaries’ earnings separately as opposed to simply mixing (i.e., burying) their results in with the parent company’s numbers.

Nevertheless, the practice of cross-ownership with associated companies and the banks continues to be too prevalent. There needs to be more reform of shareholder rights in order to facilitate expulsion of bad management. Another improvement would be the adoption of the western system of independent directors on company boards. Also, foreign investment is too often discouraged. And Japan needs to allow more foreign firms to set up in the country in order to energize the marketplace through greater competition.

In the post-WWII era up until the late 1980s, Japan’s record of economic growth was exemplary, much like what is occurring in China today. However, the history of Japan’s problems from 1990 on is an object lesson that China does not want to repeat. The particular application has to do with the handling of the exchange rate. I’ll explain this further tomorrow.

(This entry is partly based on an article appearing in The Globe and Mail newspaper, May 10 2008, reporter Marcus Gee.)

Alex Carrick

Find Canadian construction-related economic articles in Canadian Construction Market News and in the Economic Outlook section of Daily Commercial News.

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