Will China be Able to Avoid the Japan Syndrome?

Following the 1973 oil crisis, Japan's economic growth slowed down substantially and its asset prices overshot their long-term trend. The economic performance of this episode of the Japanese history has been dubbed the “Japan syndrome.” China has followed Japan's export-led growth model and the current world economy very much resembles the world economy following the oil crisis. It is then a legitimate question to ask whether China is likely to follow in Japan's steps and experience a major slowdown in its growth. The present paper shows that China can do a better job than Japan primarily because its large size allows the country to benefit from internal convergence. Based on the estimation of a growth equation using cross-country panel data, the paper forecasts that under reasonable assumptions about the growth rate of the world economy and China's investment rate, China could maintain reasonably high growth rates in the next 10 years.