China May Be Entering Its Own Lost Decade. Japan Knows What That Looks Like.

The similarities between China’s current economic conditions and Japan’s situation in the early 1990s are striking enough to command serious attention. Nippon.com’s analysis captured this comparison in detail: collapsing property market, deflationary pressure, elevated youth unemployment, and excessive corporate debt represent a combination of symptoms that Japan experienced before its own Lost Decade. But China and Japan differ fundamentally in economic scale, political structure, and external context, and drawing direct conclusions from the parallel requires care. As someone whose country lived through that period, I find myself watching China’s economic indicators with a recognition that is not comfortable.

The collapse of Evergrande in 2021 was the visible symptom of a systemic problem in China’s property sector that had been building for years. The company’s effective insolvency — with liabilities exceeding $300 billion — sent shockwaves through an industry that represents approximately 25 to 30 percent of China’s GDP when construction, materials, and related services are included. Country Garden, Sunac China Holdings, and other major developers followed Evergrande into financial crisis. The consequences spread far beyond the developers themselves: construction halted on hundreds of thousands of pre-sold apartments, local government revenues from land sales collapsed, and the wealth of Chinese households concentrated in real estate eroded substantially. The dynamics of a property bubble collapse — in Japan in 1991, in the United States in 2008, and now in China — follow a recognizable pattern.

The persistence of deflationary pressure distinguishes the current Chinese economic situation from a simple cyclical slowdown. Consumer price inflation hovering near zero and producer price deflation running persistently negative indicate structural demand weakness that cannot be addressed through supply-side policies. Japan’s experience with deflation during the 1990s and 2000s demonstrated how difficult it is to escape once the deflationary psychology is established: consumers delay purchases because prices will be lower tomorrow, businesses delay investment because demand tomorrow is uncertain, and the cumulative effect suppresses activity in ways that conventional monetary policy struggles to reverse. China appears to be at the threshold of this dynamic rather than clearly beyond it.

Youth unemployment represents the most politically sensitive dimension of China’s economic challenges. When the official youth unemployment rate exceeded 20 percent in 2023, the government suspended publication of the data series — an action that paradoxically drew more attention to the problem than continued publication would have. The underlying causes reflect structural mismatches: a rapid expansion of university graduates entering a labor market that expected continued high-growth absorption into white-collar and professional roles, but that is instead characterized by overcapacity in manufacturing and insufficient development of high-quality service sector employment. Young people without career prospects reduce consumption, defer family formation, and accumulate grievances that have political implications in any system, democratic or otherwise.

China’s demographic trajectory may represent the most durable constraint on long-term growth, and it is more challenging than Japan’s at a comparable development stage. The legacy of the one-child policy is an aging population and a declining working-age cohort that is reducing China’s labor supply at a far earlier stage of development than Japan experienced. China’s population began declining in 2022, decades earlier than demographic projections had suggested just a few years ago. The combination of demographic aging with incomplete development — what economists call ‘getting old before getting rich’ — is analytically distinct from Japan’s situation in 1990, when the country was already a high-income economy with well-developed social safety nets.

The debt problem permeates all three major economic actors simultaneously — a configuration that makes conventional policy responses difficult. Local governments, whose fiscal model depended on land sale revenues that have collapsed with the property market, are struggling to fund basic services and infrastructure maintenance. Corporations facing overcapacity and weak demand are delaying investment and where possible reducing borrowing. Households, watching the value of their real estate holdings decline while employment becomes less certain, are cutting consumption and increasing precautionary savings. When all three sectors are simultaneously attempting to improve their balance sheets, aggregate demand contracts persistently — the ‘balance sheet recession’ dynamic that Richard Koo identified in Japan and that appears to be repeating in China. Japan’s own response to these regional shifts has included unprecedented joint military training with the Philippines, a sign of how profoundly the security landscape is changing.

The differences between China’s situation and Japan’s 1990s experience are significant enough to prevent simple extrapolation of outcomes. The most important difference is political: the Chinese Communist Party has both the authority and the willingness to intervene in economic affairs with a directness and speed that Japan’s democratic political system did not permit. Beijing can direct state-owned banks to lend, mandate consumption support measures, and restructure corporate liabilities in ways that would be legally and politically impossible in Japan. Whether this capacity will be deployed effectively, or whether it will be used to protect politically connected interests at the expense of efficient resource reallocation, remains to be seen.

China’s monetary and fiscal policy responses have produced limited results relative to the scale of the challenge. The People’s Bank of China has cut benchmark rates and reserve requirements multiple times, but monetary easing has limited effect when the underlying problem is demand weakness rather than credit tightening. Fiscal stimulus has been constrained by local government financial difficulties that limit their capacity to spend. The structural shift that the situation actually requires — from an investment and export-led growth model to one driven by domestic consumption — has been the stated goal of Chinese economic planning for over a decade without achieving meaningful transformation. The political and institutional obstacles to this transition appear to be more durable than annual planning documents suggest.

China’s competitive strength in technology sectors complicates any simple narrative of economic decline. Electric vehicles, batteries, solar panels, and drones represent industries where Chinese companies have built substantial global competitive positions with remarkable speed. BYD has become the world’s second-largest electric vehicle manufacturer, directly challenging the position that Japanese automakers spent decades building. The overcapacity that characterizes much of Chinese manufacturing is a problem for global trade relations, but the underlying technology capability it reflects is real and will outlast any current trade friction. The geopolitical reverberations of these shifts extend well beyond Asia — Europe’s 800 billion euro rearmament is partly a response to the same global security recalculation. The coexistence of deep structural economic problems with genuine technological dynamism makes China’s trajectory genuinely difficult to forecast.

Japan’s exposure to a Chinese economic slowdown runs through three channels, all of which are significant. The most direct is trade: China is Japan’s largest trading partner, and sustained Chinese demand weakness reduces Japanese exports of machinery, electronics, and chemicals. The financial channel is less direct but potentially more severe: if China’s property crisis evolves into a broader financial system stress event, Japanese banks and institutional investors with Chinese exposure would be affected. The industrial competition channel is longer term but ultimately most consequential for Japan’s economic structure: Chinese EV and battery technology eating into Japanese automotive market share represents a permanent shift in competitive dynamics, not a temporary disruption.

International organizations have been consistently revising China’s long-term growth projections downward, reflecting a fundamental reassessment of the country’s economic trajectory. The prediction that China would surpass American GDP by the 2030s — once near-consensus among forecasters — is now widely questioned. Reduced potential growth from demographic aging, the exhaustion of the productivity gains from urbanization and technology adoption that drove the previous growth phase, and the structural demand weakness associated with the property sector correction all contribute to lower trend growth estimates. This matters not only for China but for all economies that incorporated high Chinese growth expectations into their investment and trade strategies.

The optimistic scenario for China involves a genuine pivot to consumption-driven growth accompanied by structural reforms. If the government substantially strengthens social safety nets — expanding health insurance coverage, pension adequacy, and educational access — Chinese households would have less reason to save precautionarily and more reason to consume. If the property sector is restructured in a way that protects household wealth while clearing developer insolvencies, the confidence effects of stabilized asset values could restart domestic demand. These reforms are politically difficult because they require accepting slower headline growth during the transition and acknowledging failures of past policy. But the capability to execute them exists.

The pessimistic scenario involves prolonged stagnation that spreads economic pressure across East Asia. If China’s domestic demand remains structurally weak and its manufacturing overcapacity continues to deflate global goods prices, Korea, Taiwan, ASEAN, and Japan — all of which depend significantly on Chinese demand — will experience sustained growth pressure. The geopolitical overlay creates additional risk: an economically stressed China facing internal legitimacy pressures might pursue more assertive external behavior, precisely at a moment when economic interdependence — the traditional mechanism that reduces the probability of conflict — is already weakened by the decoupling trend.

Japan’s unique position in this analysis is as the country with the deepest experiential knowledge of what sustained deflation and balance sheet recession actually involve over time. Japan’s two lost decades were not adequately understood in real time, even by Japanese economists and policymakers who were living through them. The policy responses — hesitant fiscal expansion, insufficient financial sector restructuring, delayed recognition of the structural nature of the problem — prolonged the episode unnecessarily. Chinese policymakers have studied Japan’s experience extensively, and the question of whether they have absorbed its lessons in ways that will lead to different policy choices is the most important unknown in the global economic outlook.

Japan’s economic and strategic interests require a clear-eyed assessment of China’s trajectory rather than either false optimism or ideological antipathy. An economically stable China that grows at 4 to 5 percent annually remains a massive market for Japanese goods and a stabilizing force in the regional economy. A China trapped in stagnation and internal stress becomes a more unpredictable neighbor and a less reliable trading partner. Japan’s interest in Chinese economic stability is real, even if the competitive and geopolitical dimensions of the relationship create tensions. The task for Japanese policymakers is to engage with China’s economic difficulties constructively while simultaneously building resilience against the scenarios where those difficulties spill across borders.

The local government financing vehicle debt problem represents the most immediately dangerous component of China’s financial system vulnerability because it is also the least transparent and the most difficult to address through standard policy tools. China’s local governments were prohibited from borrowing directly but developed an extensive system of off-balance-sheet borrowing through Local Government Financing Vehicles — entities created to borrow for infrastructure projects and repay from future land sale revenues. The collapse of land sale revenues has left many LGFVs unable to service their debts from their designed revenue streams, creating a web of contingent liabilities whose total size is genuinely uncertain even to regulators. Estimates from credible analysts range from 50 to 100 percent of annual GDP. If even a fraction of these liabilities require central government support to prevent defaults that would destabilize the banking system, the fiscal implications are enormous and the policy response options are constrained.

The Chinese banking system’s health is the transmission mechanism through which the property sector’s problems could become a systemic financial crisis rather than a contained real estate downturn. Major state banks have substantial exposure to real estate developers, LGFV borrowers, and mortgage loans on properties whose values have declined significantly. Chinese bank capital adequacy is measured using official accounting frameworks that may not fully capture the economic impairment of collateral assets. The Chinese government has both the authority and the willingness to provide bank recapitalization support in ways that private market constraints prevent in other jurisdictions, which reduces the probability of the Lehman-style sudden systemic failure. But the cost of preventing explicit banking failures through implicit government support is the accumulation of fiscal risk that constrains future policy options and ultimately must be addressed through inflation, restructuring, or growth — the same three options that every over-indebted system faces.

China’s consumer savings rate, while appearing to offer potential for domestic demand stimulus, reflects precautionary motivations that standard stimulus measures are poorly designed to address. Chinese households save at extremely high rates partly because the social safety net — pension adequacy, health insurance coverage, educational access — is insufficient to provide the security that households in more developed welfare states take for granted. Fiscal stimulus that provides infrastructure and public investment rather than household transfer payments does not address the precautionary savings motive. Housing market recovery would address the wealth effect channel through which consumer confidence has been damaged, but housing market recovery requires resolving the developer insolvency problem in a way that protects household deposits in pre-sold apartments. The complexity of the reform agenda required to genuinely address Chinese domestic demand weakness is one reason why it has been consistently discussed but insufficiently implemented for over a decade.

The demographic dimension of China’s economic challenge has a time horizon that makes it more durable than a cyclical economic downturn. The working-age population in China peaked around 2011 and has been declining since. By 2035, the ratio of working-age people to retirees will have deteriorated substantially. The social security system built for a younger population will face increasing fiscal strain as this transition accelerates. The one-child policy’s demographic legacy cannot be reversed: the cohorts who were not born in the 1980s and 1990s are now the working-age adults who are not entering the labor force, and the cohorts who will reach retirement age in the 2020s and 2030s are larger than the cohorts following them. No economic policy can change these demographic realities; it can only manage their economic consequences through productivity growth, savings mobilization, and social security system adaptation.

China’s competitive position in advanced manufacturing and clean energy technology complicates simplistic narratives of decline. The competitiveness of Chinese electric vehicle manufacturers, battery producers, and solar panel manufacturers is not a product of state subsidies alone — it reflects genuine engineering capability, manufacturing scale efficiency, and supply chain integration that have been built through years of investment and competition. BYD produces vehicles that compete on quality, range, and software capability with the best offerings from established manufacturers. This creates an asymmetric situation where China’s economy may be struggling with property debt, deflation, and demographic aging while simultaneously becoming more formidable as a competitor in specific technology sectors. Japan’s automobile industry must plan for a China that is both an economically stressed customer and an increasingly capable competitor simultaneously.

The geopolitical dimension of China’s economic difficulties matters for understanding how they might manifest in ways that affect Japan’s security environment. Authoritarian governments facing economic legitimacy challenges sometimes respond by intensifying nationalist appeals and external assertiveness, attempting to shift public attention from domestic failures to external threats. China has used Taiwan and territorial disputes in the South China Sea and with Japan as focal points for nationalist mobilization in the past. The combination of economic stress and political legitimacy pressure creates conditions where the risk of miscalculated military moves — not necessarily a full-scale invasion but aggressive probing actions — increases even if the Chinese leadership has no long-term interest in armed conflict. Japan must factor this dynamic into its security planning rather than assuming that economic difficulties will moderate Chinese foreign policy behavior.

The trade policy implications of Chinese deflation export are significant for Japan and other trading partners. Chinese manufacturers facing excess capacity and weak domestic demand are pricing products aggressively for export markets, exporting deflationary pressure to trading partners. This has already affected Japanese manufacturers in steel, chemicals, and increasingly in electric vehicles, who face Chinese competition at prices that reflect costs subsidized by excess capacity, state support, and the absence of the environmental and labor standards costs that their Japanese competitors bear. Trade remedy mechanisms — anti-dumping duties, countervailing duties — are available but require extensive documentation, create diplomatic friction, and provide relief only after substantial market damage has occurred. Managing the competitive impact of Chinese deflation export is a trade policy challenge that Japan shares with Europe, South Korea, and other industrial economies.

The investment implications for Japanese companies with Chinese operations require reassessment in light of the economic and political environment changes. Many Japanese corporations have substantial manufacturing and sales operations in China that were built during the high-growth period and that represent significant capital committed to the Chinese market. The deteriorating economic environment reduces expected returns from these operations while the geopolitical environment increases operating risks. The calculation of whether to maintain, reduce, or exit Chinese operations involves both economic projections and political risk assessments that are genuinely difficult to make with confidence. Japanese companies are approaching this decision with the same reluctance to crystallize losses that characterized the slow recognition of bad debts in Japan’s own banking system during the 1990s — an analogy that should prompt more urgency rather than less.

The Nippon.com analysis’s framing of the Japan-China parallel raises an implicit question about what Japan’s own experience suggests regarding the path out of stagnation. Japan’s eventual partial recovery from its lost decades required a combination of factors: unconventional monetary policy that broke deflationary expectations, fiscal stimulus sustained over multiple cycles, corporate restructuring that wrote off accumulated zombie debt, and structural reforms that opened new sectors to competition and investment. None of these measures worked in isolation, and the sequencing and combination were as important as the individual policies. If China’s policy authorities are genuinely studying Japan’s experience, the lesson is that the path out of balance sheet recession requires accepting short-term economic pain to address structural imbalances rather than extending and pretending until the imbalances resolve themselves — a lesson Japan itself was slow to absorb.

Japan’s strategic interest in China’s economic trajectory being gradual and manageable rather than catastrophic reflects the difference between two bad scenarios: slow Chinese decline and rapid Chinese collapse. Slow decline — gradually lower growth rates, managed property sector restructuring, sustained deflation requiring eventual policy response — creates significant adjustment costs for Japan but allows time for supply chain diversification, market development elsewhere, and diplomatic management of the relationship. Rapid collapse — sudden banking crisis, social instability, nationalist political response, or military adventurism driven by legitimacy pressures — creates acute risks including the possibility of armed conflict in a nuclear-armed state’s near neighborhood. Japan’s optimal scenario is neither Chinese dominance nor Chinese chaos but a trajectory toward managed adjustment that preserves regional stability while creating space for a rebalanced relationship. Whether that scenario is achievable is not within Japan’s control, but Japan’s engagement can either reduce or increase the probability of the worse alternatives.

The institutional memory of Japan’s own lost decades, while imperfect, gives Japanese economists and policymakers a qualitative understanding of prolonged economic stagnation that analysts in most countries lack. The experience of watching businesses survive on rolling short-term credit rather than productive activity, of watching property assets produce negative returns for a decade, of watching successive fiscal stimulus packages produce temporary improvements followed by renewed stagnation — this experience is embedded in the institutional culture of Japanese economic agencies in ways that are difficult to convey through academic analysis. Japanese engagement with Chinese economic policymakers on the analytical lessons of the lost decade period is a genuine contribution that Japan can make, regardless of whether its strategic interests and China’s are fully aligned. The human cost of lost decades is too high to withhold analytical assistance from a country that appears to be approaching one.