In early 2024, as the Spring Festival approached, the State Bureau released macroeconomic data for January, revealing a 0.8% drop in the Consumer Price Index (CPI). This marked the fourth consecutive month of negative figures, representing the most significant year-on-year decline in over 14 years—a stark reminder of just how volatile economic fluctuations can beThe last time the data exhibited such a concerning trend was during the 2009 subprime mortgage crisis in the United StatesAnother worrying statistic showed a 2.5% year-on-year decline in the Producer Price Index (PPI), though this reduction reflected a modest easing of earlier contractions.

Such indicators undeniably point to an ongoing economic struggle, with a cash crunch becoming an emerging reality.

Similar economic trajectories emerged in Japan—a fellow Asian nation that underwent its own protracted economic malaise

Around 1995, Japan struggled with extended periods of inflation rates hovering near zero

Japan’s economic stagnation lasted two decades, a period often blamed on the implosion of an economic bubbleWhile the causative factors are significant, what intrigues me more is how society responded in the aftermath of Japan's economic collapse when deflation reigned for yearsWhat societal changes did Japan exhibit as it clawed its way back from this turmoil?

In this piece, we will examine the characteristics of Japan’s economy during its deflationary phase.

The downturn in Japan's economic fortunes was primarily precipitated by a rapid descent in asset prices following a time of exuberant growth

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Initially, this asset price rise, propelled through escalating debt, created a significant bubbleThus, following the peak, even as asset prices plummeted, the accompanying debts lingered, trapping citizens and institutions in a state of insolvency, fueling the deflationary spiral.

In Japan, a variety of phenomena emerged in society following the asset downturn:

The first phenomenon was the solidification of social classes and rolesWith opportunities dwindling, inter-class mobility remained stagnant, contributing to a pervasive sense of malaise within societyEach sector experienced a rough equilibrium in supply and demand, resulting in both fixed and declining profit margins for businessesConsequently, employees in all walks of life, including business owners, saw stagnation in their incomes.

During deflation, societal expectations altered significantly

Income was no longer anticipated to rise annuallyA salary of 10,000 yen was seen as a benchmark, where if an individual could sustain that figure for years to come, it indicated reasonable competitiveness within the workforce.

This cultural shift played a role in the second phenomenon: the changing nature of personal saving ratesJapan's overall savings rate hit a historical peak of 40.2% in March 1992. In stark contrast, the lowest rate since then was documented at 22.9% in March 2014. This spike in savings came just after the burst of the asset bubble when skepticism surrounding investments led households to prioritize saving.

Only the affluent and upper-middle class could afford to save, so while wealthier individuals continued to grow their savings year after year, the middle class began to see their savings dwindle as real income growth stagnated.

By the early 1980s, roughly 5% of families in Japan had no savings, but by 2005 that figure rose to nearly 22.8%. This stark increase illustrated how many middle-class individuals had depleted their savings in the face of an enduring economic slowdown, forcing one in five households to rely entirely on their annual income for living expenses.

This data trajectory helps clarify why Japan’s savings rates first climbed and then tumbled.

Interestingly, the lowest recorded savings rate in Japan coincided with the first quarter of 2014—a compelling point for examination

Starting in 2013, the stock market began to exhibit signs of recovery, yet GDP growth remained lethargic, oscillating around the zero axis.

This insight leads to an important revelation: asset prices don’t necessarily need to elevate alongside GDP growthCertainly, the two are linked, but their relationship is not strictly linearAsset values can appreciate even in periods of low economic growth.

An additional factor to consider is the household debt-to-GDP ratio, which reached its low point at the end of 2015. Although whether the resurgence in Japan's asset prices in 2013 and 2014 played a role in actually reducing debt levels remains uncertain, a correlation existsA notable limitation is the absence of comprehensive data before 1997, which hinders a precise analysis of monetary flows within Japan.

When both corporate and individual incomes stabilize over extended periods, workers tend to adopt saving behaviors

In tandem, companies often shift towards employing part-time workers to mitigate labor costs; full-time roles are expensive, and employees increasingly seek supplementary income sourcesHence, during prolonged periods of economic stability, the growth of part-time jobs becomes expectedThe new age of gig economy professions seen in China, such as delivery agents or content creators, aligns with this phenomenon.

The fourth phenomenon is the movement of talent towards urban centersWith a scarcity of job orders and opportunities, many businesses find that only major cities can sustain sufficient demandEmployees, too, discover that viable work options frequently cluster in urban areasThis scenario compels small businesses and individual workers to gravitate toward metropolitan hubs, where income earned may not be substantial but at least guarantees employment

In contrast, smaller cities often lack provision for jobs, creating a disparity in business distribution and job opportunities.

The Japanese government sets a minimum living wage at approximately 1.5 million yen annually, categorizing those earning less as living in absolute povertyInterestingly, statistics show higher absolute poverty rates in Japan’s major cities compared to smaller regions, reinforcing the notion that while urban workers often receive minimal compensation, at least they can sustain themselves in a city context; returning to rural life may yield fewer opportunities.

Fifthly, those in higher income brackets, through gradual accumulation, will experience increasing savingsIn stark contrast, lower-income individuals tend to funnel their entire earnings into everyday expenses, effectively leaving them with zero savings.

These five societal phenomena persisted in Japan from the asset collapse in the 1990s until approximately 2014, spanning a full 24 years

During this prolonged period, ordinary citizens encountered few opportunities for advancementFor many in their prime working years, this Reality meant that an entire generation missed out on the economic benefits that had previously peppered Japanese society.

Through observing Japan's experiences, we can glean various insights into how to navigate deflationary economiesEach sector—government, businesses, and individuals—has distinct strategies for addressing such economic conditions.

For governmental authorities, when growth slows and inflation falls into deflationary territory, addressing unemployment becomes paramount.

Even if personal earnings stagnate, the priority should remain on generating sufficient opportunities for individuals to sustain themselves and families.

At the same time, government must enhance basic welfare systems and ensure that these benefits are extended to rural areas and towns to protect the living standards of the most vulnerable populations.

However, fulfilling these responsibilities is no small task

The key to addressing economic challenges lies in fostering enterprise growthAfter Japan’s economic collapse, the nation stabilized mostly due to the consistent performance of its industrial sector, which historically contributes over 30% to the economyThe strength of this sector can be attributed to the concentration of core technologies within Japanese firms, allowing production chains to remain locally based, providing critical employment opportunities during turbulent economic times—hence, pushing towards high-end industrial services becomes an inevitable trend.

From a business perspective, another avenue is international expansionIn times of overcapacity or stagnation in sales, accessing international markets can provide a swift means to clear inventory and generate profits.

For individuals with financial means, similar strategies apply—pursuing opportunities in high-barrier industries and looking for international pathways can diversify their career trajectories.

However, for the average worker, such options may feel out of reach

Most must concentrate on increasing personal savings and should exercise caution in financial ventures or investments without firm foundationsFrequent job changes can be ill-advised, especially in a landscape where roles and positions may become more defined; anticipating easy salary increases through job-hopping risks overlooking current economic realities.

During deflation, cash becomes kingSeizing opportunities to learn during tough times, preparing to invest strategically as the economy turns upwards is crucial.

Economic phases reveal varied dynamicsImagine individuals discovering a strikingly valuable gold mineInitially, their focus is solely on extracting wealthAs time passes, however, it becomes increasingly arduous to unearth resourcesConsequently, some begin offering necessities like water and food to miners, profiting from labor

Eventually, educational workshops emerge, aiming to teach newcomers how to successfully mine, an indication that the phase has shifted towards diminishing returnsAs realization hits miners that returns are increasingly elusive, there is reluctance to invest in educational pursuitsSo, those once involved shift focus to disseminating newfound lessons among untapped rural populations for a fee.

Thus, what can the average person do? Emphasize savings, prioritize job stability, and be wary of scamsMost knowledge you seek can be sourced in affordable volumes; while minding the “wisdom tax” is always important, ensuring you don’t overpay for insight is equally prudent.

Reflecting on Japan’s past, while the experiences present intriguing phenomena, I perceive a stronger undercurrent of coping mechanisms.

Japan and China share numerous macroeconomic similarities as East Asian nations with populations exceeding one hundred million, notably in investment-driven asset pricing trends and demographic shifts