Japan's economy faced a significant downturn after the bursting of the asset bubble in the early 1990sHousing prices plummeted, and the stock market experienced a severe crash, leaving both individuals and enterprises in a state of financial distressOver the next three decades, citizens engaged in a relentless saving spree, while companies focused primarily on debt repaymentThe economy seemed to be choked by an invisible hand, stagnating in a prolonged slump with no sign of recovery.

In response to this economic malaise, the Japanese government implemented a series of aggressive monetary easing policiesInterest rates were slashed repeatedly, eventually approaching zeroThe government intervened directly in the bond market by purchasing large amounts of sovereign debt to inject liquidity into the economyConcurrently, there were substantial efforts to fund infrastructure projects through increased borrowing, all aimed at spurring domestic consumer spending

The intended logic behind these policies was straightforward: lower interest rates would encourage banks to lend more freely, reducing borrowing costs for businesses, which would in turn expand operations, create jobs, and boost incomesThis cycle was expected to lead to a flourishing economy where rising consumption would further support businesses and continue the positive feedback loop.

However, reality dealt a heavy blow to these well-intentioned strategiesDecades later, Japan’s economy remained trapped in distress, with consumer spending languishing at low levels and domestic demand struggling to gain tractionDebt levels ballooned, akin to a snowball rolling downhill, while economic growth stagnated around 1 percent, barely keeping pace with the global economic landscapeIn recent years, as China has grappled with its own economic challenges and introduced a flurry of policies in a bid for recovery, many have drawn unsettling parallels between the two countries, raising questions about the ineffectiveness of Japan's money printing and whether China could find itself repeating Japan's lost decades.

To grasp the crux of Japan's struggle, one must delve into the inherent logic behind the phenomenon of money printing

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The aim is not merely to distribute currency directly to the public but to guide financial institutions to release funds through mechanisms such as lowering interest rates and increasing credit limitsEntrepreneurs use these funds to expand production, which ideally creates more jobs and boosts income, motivating citizens to spend moreSuch spending would, in turn, spur further business growth and generate a self-sustaining economic loopA critical prerequisite for this logic, however, is the smooth circulation of money.

In the early 1990s, with the economy contracting, the Japanese government went all out with its monetary policyThe initial move was a drastic reduction of the benchmark interest rate from 6 percent in 1990 to 0.5 percent in 1995—essentially giving money away for freeSubsequently, they adopted a policy of quantitative easing, with the central bank directly purchasing national bonds, injecting excessive liquidity into the market

Also, governmental borrowing soared, with debt levels rising from 60 percent of GDP to 100 percent by 2000, flooding the infrastructure sector with fundsUnder ordinary circumstances, these potent monetary strategies should theoretically have led to economic revivalHowever, after a decade of intense efforts, Japan's economic landscape remained bleak and lifelessThe root of the issue lay in the fact that while funds were being pumped in, they failed to flow into the anticipated critical sectors of the economy.

With infrastructure expansion funded by government debt, the expectation was to lower logistics costs and enhance overall economic efficiency, thus fostering growth in related sectors like steel, cement, and machineryThe theory posited that larger infrastructure investment would yield correspondingly significant improvements in production and jobs, which would boost total economic output, leading to increased tax revenue, eventually allowing for the repayment of debt—both principal and interest

Yet, the reality was starkly different and disappointingNumerous surreal scenarios unfolded, such as the government spending exorbitantly on airports and highways in remote towns of Hokkaido, where passenger traffic barely exceeded 10,000 a year, rendering these airports effectively useless and moribundThis closely mirrored China's experience in 2008, where some high-speed rail stations were accessed by less than a hundred passengers daily, leaving them struggling to cover operational costs.

Following the intense fallout from the asset bubble collapse, Japanese corporations became hesitant to embrace expansion, while ordinary citizens suffered from uncertainty and indecision about the futureEven with negative savings interest rates, they opted to save rather than spend, which meant that the vast amounts of currency printed by the central bank became stuck in financial systems and government debt—akin to water poured on sand, immediately absorbed and failing to circulate effectively within the real economy.

Turning to China post-2018, a firsthand look reveals that Beijing also engaged in liquidity measures, albeit through loans rather than direct distribution of printed money

At that time, the strategy yielded positive effects, primarily due to two vital preconditionsFirst, there was a vast overseas market where companies could sell their goods, and as long as exports continued, businesses were willing to borrow to scale up production, even amid fierce competition and shrinking profitsSecond, the housing market was in an uptrend; affluent individuals were eager to invest in real estate, while ordinary citizens were keen to enter the market despite the burden of debt—instead finding that they could cash in on property appreciation within just a few years.

However, after 2018, the liquidity strategy began to falterRising land and labor costs began to exert pressure on export potential, and the purchasing power in foreign markets could no longer sustain limitless expansion of China's manufacturing sectorSimultaneously, the myth of ever-rising housing prices began to evaporate

Despite ongoing interest rate cuts, public sentiment around borrowing to buy homes became rife with cautionFor many, home ownership entailed decades of significant debt; failure to meet such obligations could lead to financial ruin.

In recent years, while M2 (a measure of the money supply) has continued to climb, the increased liquidity circulates within the financial system without finding buyersCompanies report dwindling profits, while the growth in total retail sales has sharply declinedNotably, consumer markets showed signs of demotion, as evidenced by the falling appeal of premium cafes such as Starbucks, juxtaposed with the surging performance of discount retailers like Pinduoduo, even amidst vicious competition in the automotive and appliance industries.

Today, asset prices are generally in declineBusiness owners remain reluctant to borrow, and ordinary citizens are shunning loans, even rushing to pay off existing debts

The broader reality is that job opportunities are scarce, making work increasingly elusive, and income levels may continue to dwindleThus, it can be concluded that China now faces predicaments resembling those of Japan: businesses hesitate to expand, banks struggle to deploy funds effectively, citizens craving savings are left burdened with immense local debts, and the diminishing returns on infrastructure investment illustrate a dismal spiralEconomists term this a liquidity trap, where funds rotate endlessly within the financial system but fail to flow into the real economy—like water swirling in a pond, unable to irrigate nearby fieldsAt this juncture, no matter the quantity of money printed, unless it translates into tangible consumer demand, its impact remains minimal.

Has Japan successfully navigated its money-printing dilemma? The prevailing misconception is that despite Japan's economic stagnation, the government has been inert

Over the past decade, however, Japan has employed a variety of large-scale liquidity measures, reaching almost the zenith of quantitative easingIn 2012, Shinzo Abe launched the "three arrows" strategy, known as Abenomics, which emphasized ultra-monetary easingThe plan involved the Bank of Japan purchasing ¥80 trillion in government bonds annually, effectively monetizing the debts while committing the nation to negative interest rates, resulting in citizens actually having to pay banks for holding their savingsThe government set an inflation target of 2%, incentivizing consumer spending through direct cash distribution, including subsidies for families, research and development funding for enterprises, and vacation vouchers—all while expanding investments in emerging sectors like transportation and green energy in a bid to spur economic growth.

Initial implementation of Abenomics did produce some positive effects

Consumer spending experienced a transient uptick, the unemployment rate dipped below 2%, and household spending saw a slight increaseHowever, such rebounds proved fleeting as many citizens, fearing a return to economic malaise, were still overly cautious and preferred saving to spendingAlthough the Tokyo and Osaka real estate markets showed signs of recovery, the benefits of asset appreciation primarily enriched the affluent, leaving the average household with scant rewards.

Data illustrates that despite improvements in GDP growth following the adoption of Abenomics, the numbers hovered around the 1% mark, considerably lower than desired expectationsThe onset of the COVID-19 pandemic intensified Japan's economic woes with a downturn in exports and rising inflation, making the extreme monetary expansion policies less viableAlthough the Japanese government accumulated massive amounts of printed currency, it ultimately failed to transform societal consumption behaviors

Despite attempts to stimulate consumer spending through direct cash supplements and vouchers, the intended outcomes remained disappointingly elusiveWith savings rates consistently exceeding 20%—sometimes approaching 30%—the root causes stem from public skepticism about the future and dissatisfaction with the social security system.

Contrasting policies and trajectories characterized Japan's approach and those being adopted in ChinaPreviously, China also embraced a money supply expansion strategy focusing on supply-side reforms—primarily infusing capital into enterprises to facilitate production growth, expecting that this would indirectly stimulate consumptionNonetheless, results were tepidThe recently unveiled policy adjustments targeting 2025 marked the first shift towards moderate monetary easing in 14 years, aiming to inspire domestic demand and stabilize economic growth by providing lower rates and a more lenient lending framework, coupled with a comprehensive plan supporting local debt resolution, business capital expansion, and stability in real estate and stock markets.

Many might question whether these easing measures bear resemblances to Japan’s past

Could China, too, be on a trajectory towards a liquidity trap? While at face value, the policies seem akin to those previously adopted by Japan, an in-depth analysis reveals distinct differencesChina's policies emphasize consumer-led growth rather than solely supply-side measuresEssential programs focus on swift, direct support for citizens—such as distributing usage vouchers or shopping coupons—aiming to stimulate spending from the grassroots up, thereby fundamentally transforming liquidity mechanisms.

Moreover, China’s infrastructure investment strategy has shifted from traditional projects to emerging sectors—such as renewable energy and digital economies—integral to harnessing job creation while potentially acting as catalysts for future growthFurthermore, a pivotal advantage resides in China's execution capabilityFor instance, following the adjustment of housing loan policies, major banks promptly recalibrated mortgage rates within just two weeks—a response time that Japan has historically struggled to achieve.

This multi-faceted policy approach in China squarely targets the critical pain points observed in Japan's earlier strategies, emphasizing precision and effective governance

It is essential, though, to underscore that safeguarding against a Japanese-style economic trajectory is less a matter of the quantity of money print ed and more about whether policies can genuinely address the pressing concerns of the populaceRecently, economist Ren Zeping proposed substantial subsidies for childbirth, suggesting direct cash payments of ¥1,000 for families with one child, ¥3,000 for two, and up to ¥6,000 for families with three childrenInitially met with skepticism, this proposal resonates deeply with current social needsThe cornerstone of fostering consumer confidence hinges on citizens' sense of security; alleviating their fears related to education, healthcare, and elder care will inevitably promote spending rather than saving.

For businesses, while access to loans is pivotal, establishing a stable market environment is equally criticalThe new policies aim to support technological innovation and industrial upgrades, redirecting capital into the real economy to avert fund stagnation in real estate and finance—essential to conquering investment hurdles

Addressing local government debt remains vital; reliance on real estate development to repay government obligations through inflated land acquisition prices is no longer sustainableFuture efforts should emphasize enhancing returns on infrastructure projects, steering clear of superficial ventures that merely contribute to a debt burden.

In conclusion, Japan’s experience serves as a potent reminder that an over-reliance on an easing strategy does not remedy underlying structural issuesHowever, China boasts a vast domestic market, exceptional bureaucratic execution, and a clear consumer-oriented agenda—all of which hold the potential to carve out a distinctive path forwardThe answer to whether the country can evade a liquidity trap may be embedded in the issuance and utilization of consumer vouchers, reflecting the public's expectations and confidence in future economic prospects