The world is now in fear of a "recession that will surpass the Lehman Brothers financial crisis of 2008.
In the U.S., the balance of "credit risk mutual funds", which incorporate highly risky corporate bonds and other assets, stood at approximately $3.6 trillion at the end of 2020, an increase of 8.6 times over the preceding 20 years (Nikkei, October 4, 2021). The Lehman crisis was triggered by the damping of the bonds of mortgage lenders Freddy Mack and Fannie May. According to Wikipedia, the amount of "subprime mortgages" originated mainly from the bonds of these two companies was estimated to be $1.3 trillion in March 2007. Since the balance of "credit risk mutual funds" by far exceeds this amount, a collapse of their prices may well trigger a financial crisis.

Apart from this, amid the widening income inequality that has progressed even further since the Lehman crisis, expectations for "socialist economies" or redistribution by powerful politicians are rising in the developed countries. The failure of the Soviet-style authoritarian and planned economy has long been forgotten.

Nowadays, in Russia and China, we are seeing a return to an authoritarian and command economy due to their own circumstances, but let us recall the history so that people in the developed countries will not be misled into it.

Historical Trends

The Soviet Union's planned economy system literally collapsed in 1991 due to stagnant technological innovation and accumulated budget deficits, and the market economy system seemed to have won a permanent victory. Francis Fukuyama and others in the U.S. were proud of this, calling it "the end of history" and the eternal triumph of democracy.
But now, with the end of the Cold War, China's entry into the Western economy has ironically resulted in the collapse of both the Western market economy and democracy. The exodus of industry to China has resulted in the disappearance of many high-wage jobs in developed countries and the division of society into a handful of wealthy and vast impoverished groups. The impoverished are putting aside freedom and democracy and turning to populism and fascism in search of immediate "redistribution.
Meanwhile, Russia and China, now in a better position, are taking steps to strengthen their command and state economies in order to compete with the West, and to consolidate their own power.

The Case of Russia
　
Russia was ultimately unable to convert to a market economy (on the production side). The world's manufacturing industry is controlled by major corporations, and Russian companies lack the funds, technology, and management skills. Moreover, due to the war in Ukraine, foreign companies have started to withdraw one after another: Exxon, Shell, and others from the oil sector, GM, Toyota, and others from the manufacturing industry, furniture giant IKEA and others from the distribution, and McDonald's and others from the restaurant industry. Russian companies are taking over the remnants, but they lack the funds, technology, global supply chain and management know-how, so it is difficult to say how long they will be able to sustain themselves.

The withdrawal of foreign companies has even hindered the extraction of crude oil in some areas. In Sakhalin I, crude oil production has dropped by two-thirds since the withdrawal of Exxon. Passenger car production, which had been dependent on foreign investment, has been devastated, and in May it was down 97% from the same period last year.

In addition, on October 19, President Putin established a "Special Coordination Committee" to shore up military production. He gave it an extrajudicial authority to relocate resources. Prime Minister Mishustin, who was entrusted with this responsibility, is forced to override the budget he himself had compiled (which is now a law) and to relocate the resources arbitrarily.

This would return Russia to the command and military economy of the Soviet era (over 60% of industrial production was considered military-related). Or rather, much of the funds would be squandered and embezzled, and the fighting over funds will intensify among the various ministries.

Putin tells the local municipalities to share the burden, and their coordination has been entrusted to Moscow Mayor Sobyanin, who is a former rival of Mishustin for the prime minister's position. This will add to the confusion.

Soaring energy export prices are still propping up the Russian economy, but the cost of the war will augment the budget deficit. If energy prices fall, the Russian economy will collapse, and its people, accustomed to Western products and Western-like consumerism, will begin to voice their discontent.

The Case of China

In China, the standard of living has improved, but the Xi Jinping administration is running in the opposite direction of freedom and democracy, which in normal cases should be facilitated by economic development. He is trying to remove the language of "reform and opening up", which has brought about the current prosperity and the country's rise to a super-power, from the "Law on Legislation" that sets forth the basic principles of legislation.

During Mao's Cultural Revolution in the late 1960s a whole generation of young elite was "discharged" to the countryside and deprived of formal educational opportunities. Pundits at that time expressed fears on what would happen, when these uneducated elite comes into power. And now their fear has become a reality.

The Xi Jinping leadership has given top priority to maintaining the Communist Party's power and has removed economic technocrats from the top echelon of the government. It is as if the leadership were determined to "do whatever is wrong with the economy."

The excessive lockdown imposed by the Corona disaster has severely hampered the economy of Shanghai and other cities. What is more, Li Qiang, who has no experience in central government administration, is poised to be elected premier at the People's Congress in March 2023, taking the reins of economic administration. His government will not be subtle enough to run the economy through indirect means such as fiscal and monetary policies, but will develop a command economy that says, "Make what, how many, by when, whom to sell, at what price, and how many to sell. " Foreign companies, too, will be subjected to their rule.

In the author's experience, bureaucrats in former socialist countries, even after declaring a "transition to market economy," routinely make requests, tantamount to orders, to foreign companies regarding the amount of production and exports for the following year, bewildering them.

In 1898, at the end of the Qing Dynasty, Empress Dowager Cixi blocked her son Emperor Guangxu's reform policy (the Boshu Incident), and two years later, when the Yihe Dan movement to exclude foreigners broke out, she took advantage of it to declare war on the Western powers and suffered a crushing defeat. I don't think modern China will go this far, but something like the 2012 anti-Japanese movement that attacked several Japanese business establishments may well happen.

Will the world and Japanese economies tick without China and Russia?

For any developed country, economic relations with Russia are marginal, except for energy resources. The impact of Russia's exit from the global economy is limited to energy resources and some raw material sectors. Although Russia's exit will temporarily raise the prices of energy resources, Japanese companies will not lose their competitiveness. Because all companies in developed countries will have to raise product prices and wages in droves, too.

In the case of China, it is much more difficult to deal with because it has become the "world's factory". Rather than a black-and-white decision, a detailed and realistic response is required.

For example it would be a childish mistake to allege as follows: "Japan depends on the Chinese market for more than 20% of its exports. If this were to disappear, the Japanese economy would not be able to sustain itself."
If we analyze what Japan exports to China, the fear will substantially diminish. Rather than exporting finished products such as passenger cars and electrical goods, Japan exports "production goods" such as high-tech parts, materials, and production machinery to China. Most of these products are destined for Japanese and other factories in China, and many of the products assembled there are re-exported to Japan, the U.S., and Europe. If the assembly base is moved outside of China, Japan's exports will go there.

Secondly, there is the argument that "if China is omitted, the global supply chain will be disrupted." It is true that China is the exclusive supplier of some raw materials, such as lithium. However, most of those items can be produced in other countries although at a cost. Product assembly for Apple's iPhone, SoftBank's Pepper (AI robot), etc., can be moved from China to other countries. Since the U.S. is about to impose strict restrictions on semiconductor exports to China, it will not be possible to continue assembling high-tech products in China, anyway.

Restructuring the Supply Chain

During the 30-year history of China's reform and opening up, the West has created supply chains in China for assembly in its own factories. It will take time to rebuild elsewhere what has taken 30 years. But if they remain in China, they will eventually be nationalized by the government.

Whether it is product assembly or component production, it is not easy to find an alternative location to China. Not just any low-wage country will do. If you want to export to the U.S., it would seem that you should manufacture in the U.S. However, if you build a factory in a state with strong labor unions, the factory will be preyed upon by labor unions (leaders).

Taiwan's TSCM is building a factory in the U.S. at the request of the U.S., but is having trouble finding workers. TSCM is building in Arizona, where a U.S. competitor, Intel, already has a plant and has been building a pool of workers.
Other potential sites include Southeast Asian countries such as Vietnam, Bangladesh, India, Turkey, and parts of Africa such as Kenya, all of which have their own problems - difficulty in securing land, lack of infrastructure, corruption of local authorities, lazy workers, etc. --These problems require careful investigation and decision making. The key will be to develop a competent and trustworthy local management staff.

Japan's position becomes clear

For Japan, there is no need to confront China outright, but the time has come to impress upon the world the significance of Japan as an Asian major power, which upholds the universal values of democracy and free economy. Japan can also use low-interest loans and ODA to promote infrastructure construction in developing countries on a fair basis (rather than trapping them in a debt trap, as China does).
The Japanese are usually clumsy in explaining and promoting themselves, but the modern values are already entrenched in the society. Japan can be relied upon as standard-bearer of open and democratic society.