This article was compiled from Minsheng Securities's “Implications of Japan's “Dual Cycle” Economy for China

Background: Trade frictions between the US and Japan are an important catalyst for the Japanese economy's “double cycle”

After World War II, Japan adopted an export-oriented economic development model, which at one point achieved good results. However, in the 80s, trade frictions between Japan and the US became more frequent. The US repeatedly imposed sanctions on Japan in the fields of automobiles, semiconductors, telecommunications, finance, etc. Due to excessive reliance on the US market, Japan was forced to compromise and voluntarily restrict exports, making the economic model dominated by external circulation unsustainable. In order to deal with this problem, Japan's economic policy began to shift from “trade nation building” to “technology nation building,” and the economy began to switch to a model where internal circulation is the main focus and external circulation is supplementary.

In order to create an “internal circulation” economy, Japan has adopted six important measures

1. Reduce taxes and fees to promote consumption;

2. Financial expansion and borrowing to develop infrastructure;

In order to cope with weak external demand due to a possible deterioration in the external market, the Japanese government has carried out more than 10 rounds of fiscal stimulus plans, focusing on expanding public investment. Among them, improving housing and living environments is a major public utility investment project in Japan, particularly public housing projects (equivalent to guaranteed housing). In 1987, 1.65 million new housing units were built in Japan alone, and 1.4 million new housing units were built in 1988, setting a record.

3. Adjust the industrial structure and develop new industries;

In the 80s, Japan actively promoted industrial transformation and upgrading. First, the scale of the petroleum, steel, shipbuilding and other sectors was reduced by about 20%, and the reduced manpower and capital were invested in new industries. Second, actively support industries such as electronic communications, computers, services, new materials, bioengineering, and aerospace to expand domestic demand in Japan.

4. Develop small and medium-sized cities to create balanced development;

5. Raise wages and increase residents' income;

6. Relax financial regulations and encourage the development of consumer loans.

The first five measures have all achieved good results. Japan's national income has continued to rise, consumption has been driven, and industrial transformation and upgrading has been a huge success; however, the liberalization of financial regulations and monetary easing have exacerbated Japan's financial and housing bubble problems.

After the Japanese economy moved towards a “double cycle,” consumer stocks and interest rate bonds emerged from a wave of super bullish growth

1. The performance of the Japanese consumer sector has been extremely strong since the 90s

Japan began its economic transformation in the 80s, transforming from an export-oriented economy with a “trade nation” to a “technology-based” domestic demand-driven economy, and achieved significant results. Although Japan experienced a valuation bubble in the stock market and property market in the late 80s and early 90s, it later fell into a “lost 20 years.”

However, the performance of the Japanese consumer industry is extremely strong. On the one hand, consumption is contributing more and more to economic growth, and on the other hand, consumption is becoming more and more high-end due to consumption upgrades. In the stock market, the Nikkei consumer sector performed best. Whether it was the essential consumer goods sector or the non-essential consumer goods sector, the long-term performance was better than the general market trend.

2. Since the 90s, Japanese interest rate bonds have gone out of a long wave

The dominance of “internal circulation” means that economic growth is shifting from investment to consumption, from exports to domestic demand, and from capital-intensive industries to technology-intensive industries. Large amounts of capital have flowed from traditional industries to emerging industries and consumer industries. This means Japan's capital utilization efficiency has improved, and risk-free interest rates have declined.

Japan's interest rate bonds ushered in a wave of super bull markets. Although the Japanese government issued a large amount of debt during this period, interest rates were not significantly raised. The yield on Japan's ten-year treasury bonds fell from around 8% in the early 90s to negative interest rates in recent years.