Why inflation is not a problem for Japan and China?

Most countries worry about inflation.

Japan and China don’t.

Not because they don’t print money.
Not because they don’t stimulate.
Not because they don’t want growth.

But because their economies are structured in a way where inflation struggles to survive.

To understand why, you have to stop looking at prices and start looking at behaviour.

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the common myth: “they just need more stimulus”

The usual explanation goes like this:

• Japan has low inflation because policy wasn’t aggressive enough

• China has low inflation because demand is weak temporarily

But this ignores a key fact:

Both countries have already done the things that are supposed to cause inflation.

Japan

• near-zero interest rates since the late 1990s

• massive quantitative easing after 2013

• one of the largest central-bank balance sheets globally

China

• repeated rate cuts

• liquidity injections

• large-scale credit creation over two decades

If inflation were simply about money supply,
both countries should have runaway prices by now.

They don’t.

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inflation needs belief, not liquidity

Inflation doesn’t start when money is created.
It starts when people believe:

• incomes will rise

• jobs will be secure

• demand will keep growing

That belief makes people:

• borrow more

• spend sooner

• raise prices confidently

In Japan and China, that belief is missing.

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japan: the economy that learned to fear inflation

Japan’s inflation problem is actually a success problem from the past.

the 1990s trauma

• late 1980s: asset bubble in stocks and real estate

• early 1990s: bubble bursts

• balance sheets collapse

Households, firms, and banks all learned the same lesson:

Debt can destroy you.

From that point on:

• households saved more

• firms avoided leverage

• banks became conservative

Even decades later, that lesson stuck.

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what japan does instead of inflating

When demand improves:

• companies cut prices to protect market share

• wages rise slowly, if at all

• firms hoard cash instead of expanding capacity

Even during Abenomics (post-2013):

• profits improved

• stock markets rallied

• liquidity surged

But behaviour didn’t flip.

Japan never returned to:

• aggressive borrowing

• rapid wage inflation

• price-led demand cycles

So inflation never became persistent.

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china: too much supply, too little pricing power

China’s story is different, but the outcome is similar.

China does not lack demand entirely.
It lacks pricing power.

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china’s core issue: excess capacity

Over the last 20 years, China built:

• too many factories

• too much housing

• too much infrastructure

This worked when:

• urbanisation was fast

• exports were booming

• global demand was strong

But today:

• population growth is slowing

• property demand has peaked

• global trade is fragmented

The result:
supply is abundant, demand is selective.

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what happens when supply dominates

When companies compete in an overbuilt system:

• prices are cut to survive

• margins shrink

• wages stay under pressure

This is why:

• EV prices fall in China

• manufacturing margins compress

• exporters compete on price, not brand

You cannot get inflation when:

• everyone is trying to sell

• no one dares to raise prices

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the property shock changed household behaviour

For Chinese households, property was:

• the main store of wealth

• the main source of confidence

After 2020:

• developers collapsed

• unfinished projects rose

• property prices stagnated

That did something important:

It made households cautious.

When your biggest asset stops feeling safe:

• you save more

• you spend less

• you delay big decisions

That behaviour is inflation-negative.

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why stimulus doesn’t “stick” in both countries

Both governments can:

• inject liquidity

• support banks

• push credit into the system

But they cannot force:

• firms to invest aggressively

• households to feel optimistic

• wages to rise sustainably

So stimulus creates:

• temporary activity

• short bursts of price movement

But not a lasting inflation cycle.

Inflation fades because behaviour reverts to caution.

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the shared pattern: balance sheet protection

Japan and China look different on the surface.
But underneath, they share the same behaviour.

When people feel:

• scarred by past crashes

• uncertain about future returns

• unsure about asset values

they protect their balance sheets.

Protection mode means:

• saving > spending

• repayment > borrowing

• competition > pricing power

Inflation cannot thrive in that environment.

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why inflation is not a policy problem for them

For Japan and China:

• inflation is not something to fight urgently

• it’s something that rarely lasts anyway

Their bigger problems are:

• weak wage growth

• low confidence

• falling returns on new investment

In that context, low inflation is a symptom, not a threat.

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the contrast most people miss

Countries that struggle with inflation usually have:

• younger populations

• rising aspirations

• stronger risk appetite

• belief that tomorrow will be better

Japan and China currently don’t.

Which is why:

• money creation doesn’t overheat

• credit doesn’t explode

• inflation never becomes a real problem

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the one thing to remember

Inflation is not about:

• how much money exists

It is about:

• how people behave with that money

Japan and China don’t lack liquidity.
They lack willingness to take risk.

That’s why inflation isn’t their problem.