Shanghai's Deflation Spiral: The Current State of the

1. Why are prices "continuously falling" in China now?

According to data released by the National Bureau of Statistics on the night of June 8, the CPI for May 2025 fell by 0.1% year-on-year, marking a negative trend for four consecutive months. The PPI dropped by 3.3%, marking the largest decline in 22 months.infomoney.com.brreuters.com
The background includes a "triple whammy" of ① a real estate recession, ② stagnation in exports due to tariff increases, and ③ intensified price competition in automobiles and home appliances. Particularly, the "price-cutting battle" in EV sales overheated to the point where the government requested an "end to the price war."reuters.com

2. Are the government's intervention measures effective?

In May, the People's Bank of China lowered the seven-day reverse repo rate to 2.15% and reduced the reserve requirement ratio for major commercial banks by an average of 0.25 points. However, the effect of the rate cut did not sufficiently spread to mortgage rates, with new home sales falling by 8.2% year-on-year. It appears that monetary easing and real estate suppression measures are in a tug-of-war.scmp.com

3. Voices on Chinese social media—"#Deflation (Tong Suo)" and "#Price Cut Survival Battle"

On Weibo, the newly coined term "#Deflation = Currency Contraction" is spreading, with sarcastic comments like "a false sense of happiness where only prices fall while salaries remain unchanged" standing out. Meanwhile, on Xiaohongshu, posts about saving techniques and "price cut waiting calendars" are among the most popular, underscoring the cooling consumer sentiment. On note.com, analytical articles stating "deflation is a sign of weak domestic demand" have garnered attention.note.com

4. Why Japanese social media was buzzing

On X (formerly Twitter), "#ChinaDeflation" and "#ExportDamage" briefly trended from the early hours of June 9. Many voices expressed concerns like "If China 'Japanizes,' the world will enter a new deflationary era" and "It's a bad yen appreciation correction that calls for a stronger yen." The Nikkei 225 futures fell by 200 yen early that morning but rebounded, with selling focused on trading and machinery stocks.

5. The Real Economic Impact at Present—Reading Japan-China Links by Numbers

• Japan's Exports to China (2024 Actual): 22.4 trillion yen

  • Of which capital goods (machinery and electrical equipment) account for 43%

  • A 1% decrease in exports to China lowers Japan's real GDP by 0.05 points

• Visitors from China to Japan: Cumulative 2.69 million from January to April (38% decrease compared to 2019)

  • While airline tickets and hotel rates become cheaper due to the strong yen, stagnant income within China suppresses the desire to visit Japan

• Impact on Import Prices: Effect of lowering import core CPI by 0.1 to 0.2 points (Mizuho Research estimate)

6. Bright and Dark Spots by Industry

7. What is the Financial Market Pricing In?

In the interest rate market, the view that "deflation originating from China" is pushing down global long-term interest rates is predominant. The 10-year government bond yields in the US, China, and Germany all fell by 5-10 basis points in the first week of June. In the foreign exchange market, the unwinding of the "yen carry" trade saw the dollar-yen exchange rate briefly move from the 153 yen range to the 150 yen range. Speculation about the normalization of the Bank of Japan's policy reignited, with long-term interest rates maintaining around 0.9%.

8. "Good Deflation in China, Bad Deflation in Japan" Again?

The "good deflation" theory pointed out in the early 2000s—that China's cheap exports lower global prices and improve real incomes in advanced countries—is being discussed again. Newsweek Japan reported that "President Xi said, 'What's wrong with deflation?'" and this garnered a mix of ironic sympathy from Japanese netizens facing wage stagnation.newsweekjapan.jp

9. Scenario Analysis

10. Implications for Japan's Policies and Corporate Strategies

1. Re-evaluation of Export Dependency: Companies with over 20% sales to China should increase their currency hedge ratio.

2. Strengthening Price Transfer Capability: To counteract the price reduction pressure from Chinese products, it is urgent to build a high-value-added model that can secure profits even in an "international price × yen appreciation" environment.

3. Diversification of Inbound Tourism: Deepen travel demand from ASEAN and Europe to reduce dependency on China.

4. Policy Aspect: The Japanese government should build a bulwark to prevent "good deflation" from turning into "stagnation" by promoting green investment leveraging lower energy costs and expanding wage increase tax incentives.

11. Conclusion

While China still maintains a real growth rate of 4-5%, the situation where structural oversupply and income disparity suppress prices is not easily resolved. For Japan, the contradictory impacts of "shrinking exports" and the "benefits of low inflation" will come hand in hand. It is time for companies and investors to face the reality of the epicenter of deflation shifting from China to Japan and to enter a phase of enhancing resilience in the "post-China" era.

References & Sources

• InfoMoney "Preços ao consumidor na China caem pelo 4º mês…" 2025/6/8infomoney.com.br

• Reuters "China’s factory-gate deflation worst in 22 months…" 2025/6/9reuters.com

• South China Morning Post "China’s consumer prices fall in April…" 2025/5/10scmp.com

• note.com "China's deflation is a sign of weak domestic demand" 2025/3/14note.com

• Newsweek Japan Edition "China's Economic Slowdown and Deflation Pose an 'Unignorable Risk' to the Global Financial Market" 2025/1/12newsweekjapan.jp

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