In 1990, Japan faced a catastrophic collapse of its asset bubble, leading to a prolonged economic stagnation referred to as the "Lost Decade"—though it ended up lasting over 30 years. During this downturn, Tokyo's real estate prices plummeted dramatically, while the stock market suffered severe losses, leaving the economy trapped in a quagmire. With citizens frantically saving and companies burdened by debt, Japan's economy found itself in a chokehold, with persistent low growth and an overall sense of stagnation.

In an effort to combat this malaise, the Japanese government resorted to aggressive monetary easing policies. Interest rates were slashed repeatedly until they approached zero. The government intervened in the bond market by purchasing large volumes of government bonds to inject vast amounts of liquidity into the economy. Simultaneously, infrastructure projects were funded with heavy borrowing in hopes of sparking consumption. The underlying belief was straightforward: lower interest rates and ample liquidity would encourage banks to lend, leading businesses to invest and create jobs. As employment opportunities grew, so would consumer spending, resulting in a virtuous cycle of economic growth.

However, the reality turned out to be disheartening for the Japanese government. Decades passed, and the economy remained ensnared, with consumer spending languishing and internal demand weak. Debt levels ballooned like a snowball rolling downhill, with economic growth lingering around a meager 1%. Recent economic challenges faced by China and its series of policy responses echo those suffered by Japan, prompting concerns and introspection: Why did Japan's monetary expansion fail? Could China find itself trapped in a similar cycle of ineffective monetary policy?

To understand why Japan's cash infusion strategies fell flat, one must grasp the internal logic of such approaches. Printing money isn't merely about doling it out directly to consumers but involves guiding banks to release funds through decreased interest rates and expanded credit ceilings. Businesses receiving this capital invest to ramp up production, thereby creating jobs that enhance household incomes, which theoretically leads to increased consumer spending. This seamless funding flow is the crucial prerequisite for this economic logic to function correctly.

In the early 1990s, in the face of economic contraction, Japan sprang into action with an aggressive monetary policy. Initial measures brought the benchmark interest rate from 6% in 1990 down to a striking 0.5% in 1995. The second maneuver involved the central bank purchasing government bonds directly, initiating a quantitative easing program in 2001 to inject unprecedented liquidity. Finally, heavy government borrowing fueled massive infrastructure projects, with debt levels skyrocketing from 60% of GDP to over 100% by the year 2000. Yet, despite this powerful triple-pronged monetary policy, the economy remained lethargic after ten years of effort. Although capital was released, it failed to flow into critical areas that could spur growth.

The government's ambitions regarding infrastructure development were designed to lower transportation costs and enhance economic efficiency, hoping to stimulate related industries like steel, cement, and machinery. The theory posited that the greater the investments in infrastructure, the more job opportunities would be generated, leading to increased economic activity, and subsequently, a rise in tax revenues to service the accumulated debt. However, the reality diverged significantly from this optimistic outlook, with many infrastructural projects in remote areas yielding minimal economic returns. For instance, rural airports constructed in Hokkaido attracted fewer than 10,000 passengers annually, rendering them effectively useless—a stark parallel to some high-speed rail stations in China that struggle to cover operating costs.

Post-bubble, Japanese companies grew skittish about expansion, while ordinary citizens were engulfed in uncertainty about the future. Even with negative interest rates at banks, savings persisted as the favored option for households. Consequently, the vast amounts of money printed by the central bank were ensnared within a financial system and a labyrinth of public debt, akin to water spilled on sand—immediately absorbed and rendered ineffective in driving real economic circulation.

Reflecting on China's experience before 2018, the nation employed similar liquidity-stimulating strategies without directly printing and distributing money. Instead, funds flowed through loans to businesses and households, demonstrating significant short-term success. Key to this success were two factors. First, a vast international market offered opportunities for companies to export their products. Even with thin profits, the incentive to borrow for expansion remained high. Secondly, the real estate market was on a meteoric rise; wealthy individuals invested in properties, while regular citizens viewed real estate as a sure-money venture, confident in their ability to turn profits.

However, by 2018, the water-release strategy began to show diminishing returns. Rising costs for land and labor restricted growth in exports. The once unshakeable belief in perpetual real estate price increases faltered, and people became apprehensive about buying properties through loans due to long-term debt burdens. As M2 monetary supply figures surged, funds primarily circulated within the financial systems without finding their way into the economy. Compounding the issue, corporate profits continued shrinking, and the growth rate of social retail sales decreased significantly.

Today, asset prices broadly decline, with businesses reluctant to borrow and citizens shunning loans for housing, often opting to repay existing loans early. As job opportunities dwindle and job searches become increasingly futile, many find their incomes not only stagnant but likely decreasing. China faces a similar predicament to Japan—where businesses are hesitant to expand, banks are struggling to lend effectively, and citizens prefer to save rather than spend, all while local debt remains high and infrastructure yields diminishing returns.

The ongoing theoretical concept of a "liquidity trap" aptly captures this situation: funds whirl within the financial system without being injected into the real economy, akin to water swirling in a pond, unable to nourish crops. Under such conditions, regardless of how much money is printed, if it doesn't translate into genuine consumer demand, its impact is negligible.

Despite the misconceptions surrounding Japan's monetary policies, this experience conveys several vital lessons for other nations. Although monetary easing policies have been criticized for their ineffectiveness, they were not completely futile. Over the last decade, Japan's government and central bank enacted major monetary injections, culminating in "Abenomics," launched by Shinzo Abe in 2012. This comprehensive strategy relied on aggressive monetary measures, which included purchasing vast quantities of government debt and imposing negative interest rates to compel citizens to spend rather than save. However, despite some initial signs of recovery, such as a minor uptick in household spending, these were short-lived and did little for the broader population.

Much like China found itself in 2023, Japan's government implemented cash and voucher programs hoping to encourage spending, yet these efforts had limited impact given deep-seated cultural tendencies towards savings necessitating deep explorations into the reasons behind prevailing consumer behaviour issues.

In contrast to Japan's previous strategies, China's current economic policy leans towards direct consumer support. This move emphasizes spending from the ground up, ensuring that liquidity reaches ordinary citizens rather than remaining locked within corporate and fiscal black holes. Additionally, investments are refocusing on dynamic fields like renewable energy, digital economies, and green transport—all capable of generating substantial employment opportunities and acting as potential economic growth engines.

China's capability for swift execution stands in stark contrast to Japan's struggles. Recent changes in housing loan policies, for example, saw banks rapidly adjust rates with astonishing efficiency, something Japan has historically found challenging to replicate. It is crucial for China's latest policy endeavors to pinpoint and remedy bottleneck issues that previously led to misaligned investments.

The critical takeaway from Japan's harrowing experience is that simply relying on monetary expansion will not resolve deeper structural quandaries. China's expansive market, robust policymaking agility, and a clear consumer-oriented strategy present the opportunity to carve a different path forward. The potential to escape the fate seen in Japan largely hinges on how well consumer trust can be restored—an outcome intrinsically tied to the assurances surrounding education, healthcare, and retirement. Ensuring these concerns are adequately addressed may facilitate an environment where spending revitalizes investments, igniting economic vitality once again.

Ultimately, the lessons from Japan illustrate the foundational role of domestic demand in fueling economic growth. The ability to cultivate consumer confidence emerges as the critical factor in rejuvenating this demand. China's recent policy adjustments, now honing in on spending and tangible support, indicate a shift toward more effective, particular strategies aimed at avoiding earlier pitfalls. Though the path to recovery may face hurdles, a properly directed effort may foster robust and sustainable growth.