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China may be in a dreaded ‘balance sheet recession’

As Janet Yellen kicks China’s economic tires in Beijing this week, she may be surprised by how often the attention is veering toward neighboring Japan.

It just so happens that Yellen’s first China trip as US Treasury secretary coincides with intense debate about Asia’s biggest economy experiencing a Japan-like “balance sheet recession,” one that, if true, will be devilishly hard to reverse.

The reference here is to economist Richard Koo’s oft-cited observation about why Japan plunged into deflation and stagnation in the 1990s. Specifically, this is when economic insecurity prods a critical mass of households and companies to prioritize boosting savings and paying down debt over consuming and investing.

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