Editor's note: The ongoing discussions about Japan's "Lost Decades," a period of prolonged economic stagnation spanning 30 years, have sparked debates on whether Japan indeed lost momentum for three decades, the reasons behind it, and the potential takeaways for China. In June 2023, Professor Zhou Muzhi from Tokyo Keizai University delivered a lecture in Shanghai, offering a novel and comprehensive perspective on how Japan missed out on the prosperity driven by Moore's Law. The fourth segment of his lecture compared China and Japan's economic development and made a comparative analysis of the two country's development trajectory.

1. Comparing the similarities and differences in China-Japanese economies

Returning to my discussion with professor Ezra F. Vogel, one of the topics we delved into was the comparison of similarities and differences in the economies of China and Japan. At that time, I highlighted the "similar" aspects, which referred to both countries' reliance on exports and their rise driven by urbanization. On the other hand, the "different" aspects referred to China's dependence on the global supply chain, while Japan excelled with a comprehensive industrial chain.

My doctoral dissertation focused on explaining the phenomenon of new industrialization in Asia. After World War II, most developing countries gained independence, but struggled to successfully achieve industrialization. Their attempts and experiments mostly ended in failure. It wasn't until the 1980s that the Four Asian Tigers emerged, achieving export-driven industrialization.

The emergence of Four Asian Tigers triggered numerous explanations and debates internationally. Some attributed it to the Confucian heritage shared by these nations, while others suggested it was due to authoritarian development strategies. The explanations were varied and diverse. Given my engineering background and subsequent study of economics, I approached this issue from a technical perspective and proposed three explanatory angles.

Mechanical-Electronic Revolution: The advancement of semiconductor technology, driven by Moore's Law, allowed for the integration of information and mechanical technology in equipment. This greatly expedited the industrialization process. After graduating from university, I participated in the construction of Baosteel Phase II, the largest project since the founding of the nation, and was responsible for automated control equipment. I personally experienced how industrialization could be rapidly achieved through the introduction of advanced equipment from developed countries, which was unprecedented in China. In my doctoral dissertation, I coined the term "Mechanical-Electronic" and emphasized its significance by adding the word "Revolution." Both the title of my dissertation and its later published book were titled "Mechanical-Electronic Revolution and the New International Division of Labor."

Rapid development of the electronic industry: Unlike the electrical industry, which deals with energy conversion machinery, the electronic industry produces equipment related to information. The semiconductor is its core element. In the 1980s, propelled by Moore's Law, the electronic industry boomed, becoming the fastest-growing global industry. Through my research, I found out that its global layout set it apart from traditional heavy industries. It tended to have a global layout from the very beginning. It was this characteristic that made the electronic industry the dominant sector of Asia's new industrialization.

Modular production brought transformations to the supply chain: To catch up with Apple, IMB adopted the modular production model for personal computers and made the designing rules for personal computers widely available around the world. Whether software or hardware, manufacturers could participate in the computer production supply chain as long as they followed IBM's publicly available design rules. This was a massive change that completely altered the mechanism of industrial production. As this production method spread across the entire industrial sector, developing countries could easily participate in supply chains, which were becoming increasingly globalized.

In contrast, the characteristics of Japan's manufacturing supply chain are quite different. Taking the example of automobile manufacturing, Japan has a pyramid-shaped division of labor system consisting of vehicle manufacturers and tiered levels of component suppliers. The relationship between vehicle manufacturers and these suppliers requires long-term technical, interpersonal, and capital integration, forming a relatively closed system. Academically, this type of supply chain is referred to as a comprehensive industrial chain.

2. Globalization driven by Moore's Law

The open global supply chains facilitated by the modular production approach have brought unprecedented opportunities for developing nations. The explosive growth of the electronics industry has further fueled the reshaping of global industries. It's through these intertwined factors that we predicted over two decades ago the emergence of the world's largest new industrial clusters in the Pearl River Delta and the Yangtze River Delta, which would in turn foster megalopolises.

In 2007, I authored a book titled "The Chinese Economy: Mechanism of its Growth," which was later translated into Chinese and published by the People's Publishing House the following year. This book utilized the revolution in mechanical electronics, the rapid advancement of the electronics industry, modular production methods, and the global supply chain to explain China's rapid economic growth. I firmly believe that the ongoing advancement of semiconductor computational power, following Moore's Law, is propelling the evolution of human specialization and global trade - an essential cornerstone of modern globalization.

Comparing the evolution of semiconductor computational power under Moore's Law with the development of global trade, a highly correlated relationship becomes evident. In essence, as semiconductor technology advances, global specialization becomes tighter, and trade relations expand, which is an embodiment of today's logic of globalization.

China stands as both the primary beneficiary and driver of this wave of globalization, serving as its essential growth engine. On the contrary, as we look at the sweeping waves of globalization over the past few decades, it is clear that Japan struggles to keep up with the times.

What's more, China's emerging innovative companies and Japan's traditional enterprises belong to different categories.

From this perspective, it's unlikely that the Chinese economy will follow the path of Japan to experience the "Lost Decades."

3. Embracing globalization is the key

During my talk with Shinji Takeda and Masatoshi Suzuki, we discussed an intriguing phenomenon: in movies released worldwide, less than 5% had production costs exceeding $100 million, yet these high-budget films accounted for 51% of the total box office revenue. This phenomenon illustrates the rarity of achieving both low production costs and substantial box office success. While exceptions exist, relying on miracles might not always be a sustainable strategy.

So, who can invest in massive productions surpassing the $100 million mark? It's those companies with the ability to effectively penetrate the international market. Disney, with its exceptional prowess in integrating into global markets, leads the pack in producing high-budget films. In contrast, Japan has yet to produce a film with a budget exceeding $100 million, and few film and television projects are designed with international audiences in mind.

During our discussion, a Korean drama, "Crash Landing on You," gained massive popularity in Japan. It was produced by the South Korean company Studio Dragon, which was established in 2016 and exclusively creates content for Netflix. Leveraging the global streaming platform Netflix, Studio Dragon's television exports now exceed Japan's by eightfold.

In Japan's TV drama sector, NHK's historical dramas represent the largest investments, yet the budget for one of these shows is approximately only one-twentieth of Studio Dragon's. 

This phenomenon underscores the point that substantial returns are only achievable when the international market is prioritized - an essential cycle for supporting large-scale productions.

Although TBS, led by Mr. Takeda, has managed to create immensely popular TV dramas like "Naoki Hanzawa," if it doesn't actively explore the international market or embrace globalization, its full potential cannot be unleashed.

Regrettably, over the past three decades, conservative Japanese enterprises have often lacked the capacity to fully embrace globalization.

4. China's three 30 years versus Japan's two 30 years

In 2010, Mr. Yang Weimin and I co-authored a book titled "The Third Thirty Years: A New Direction for China," which divided China's development from 1949 to 2009 into two thirty-year periods, and looked ahead to the third thirty years starting in 2010. While others might have employed the method of analyzing China's history in thirty-year segments earlier than us, I have yet to come across such an approach myself. Nonetheless, this method has become widely used today.

Using 1990 as a marker, if we divide Japan into two thirty-year periods, we can observe that from 1960 to 1990, during the initial thirty-year period, Japan's share of the global economy grew from 5.4% to 10%. However, in the subsequent thirty years from 1990 to 2020, Japan's share dropped from 10% to 5%.

In these later thirty years, the Japanese government was not idle. To stimulate the economy, they pushed fiscal and monetary policies to their limits. 

To implement a proactive fiscal policy, Japan issued bonds and accumulated debt, leading to a national debt-to-GDP ratio of 261%, making it the most indebted developed nation. Monetary policy became increasingly lenient, transitioning from low interest rates to zero rates, and even venturing into negative rates. Remarkably, the Bank of Japan, responsible for currency issuance, acquired significant amounts of government bonds to provide support. They not only obtained 70% of newly issued government bonds but also held half of the bonds available in the market. In a more unconventional move, the Bank of Japan purchased a considerable volume of stocks to bolster the stock market, becoming the largest single purchaser in Japan's stock market.

Although Japan's government and central bank had taken substantial risks in terms of national debt and currency with these unconventional stimulus policies, they were still unable to breathe new life into the Japanese economy. This underscores the significant negative impact of three detrimental factors: small constituency system, the consumption tax, and risk-averse thinking.

Throughout modern history, the trajectories of China and Japan have often moved in opposite directions. In China's initial thirty years since the founding of the People's republic of China, its share of the global economy plummeted from 5.2% to 1.7%. In the second thirty years, the implementation of the reform and opening up policy boosted China's share to 9.2%, and today, this share has surged to 18.2%. China's economic scale is poised to soon exceed Japan's by fourfold.

Zooming out on the timeline to the pre-Opium War era of 1800, China commanded an impressive 33% share of the global economy, while Japan's share was a modest 3.6%. By 1990, Japan's share peaked at 10%, but China's share hit a nadir at 1.7%. From that pivotal point, China's share in the world economy has consistently risen, while Japan's has steadily fallen, a trend that persists even today.

5. Is China a risk or opportunity?

How should we perceive China's rise? Japan needs to think from a broader and forward-looking perspective.

During the G7 summit held in Hiroshima this May, a consensus was reached on mitigating the risks associated with China's economic rise. Remarkably, the fact that this "de-risk" mindset are extended into relations with China has, in part, underscores the reason why I've been consistently emphasizing the dangers inherent in overly risk-averse thinking.

Over the years, I've often emphasized to my friends in Japan that China isn't a risk for Japan. Instead, it represents Japan's most significant opportunity. Failing to seize this opportunity could spell irreparable consequences for Japan's economy.

Allow me to conclude my speech with another story. Adjacent to this conference venue stands the Shanghai World Financial Center, a location many of you may have visited. At one point, it was China's tallest skyscraper. It was invested by the Japanese company Mori Building. President Minoru Mori, along with his father, established the firm. His father had also studied and taught at Tokyo Keizai University. Minoru Mori possessed both a visionary understanding of urban development and unwavering faith in China's progress. At the onset of Pudong's development, Mr. Mori, under the encouragement of Mr. Zhao Qizheng, committed substantial resources to construct this building in Pudong New Area. The pressure was intense at that time, as many advised against such a sizable investment in China. Nevertheless, he remained steadfast in his conviction about China's promising future, weathering various disruptions and challenges during the construction phase. 

On Nov. 18, 2009, during the opening forum of the Shanghai World Financial Center, Mr. Mori, Mr. Heizo Takenaka - who had once overseen Japan's Cabinet economic policy - and I discussed and forecasted the future of Asian urban development. The opening coincided with the aftermath of the global financial crisis triggered by the U.S., leading to widespread economic uncertainty and causing numerous international clients to back out. The challenges were immense. Yet, Mr. Mori's foresight paid off. China's rapid economic growth quickly reversed the situation, and the building has since become a valuable asset for their company.

This story underscores that China presents a remarkable opportunity for Japan. It's regrettable if Japan's political and industrial sectors fail to adopt a broad and forward-thinking perspective to grasp this reality.

Of course, Japan's economy is currently strong, society is stable, and citizens lead relatively well-off lives.

(The author is a professor at Tokyo Keizai University.)

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