...By fostering close, cooperative ties among the state, big corporations, and banks, Japan’s policymakers encouraged investment and guided a national industrial strategy. Bureaucrats in Tokyo interfered with markets to a degree unthinkable in the U.S. by protecting nascent industries and directing financing to favored sectors and companies. Backed by such support, Japanese companies burst onto the world stage and pushed their American competitors to the wall.
But even as Japan appeared destined for greatness, its economy was, in reality, starting to rot. Those clubby ties among finance, business, and government misallocated capital and led to wasteful investments. Growth was given a boost by cheap credit in the second half of the 1980s, but that also helped inflate debt levels and stock and property prices. When this “bubble economy” burst in the early 1990s, the financial industry was flattened. Japan has yet to fully recover.
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Japan can provide China with a model of exactly how not to handle such problems.
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Officially, China’s president, Xi Jinping, has embarked on a different course. He’s pledged to undertake a sweeping program of pro-market reforms that could shift the economy toward new sources of growth, scrub out excess and waste, and promote private enterprise. In practice, however, China is following in Japan’s footsteps. Despite promises to eliminate zombie companies, Beijing has kept them alive...
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