No country for old yen, or big trouble in little China? While the world’s two economic powerhouses can share movie title puns, they are also experiencing comparable economic conditions, albeit three decades apart. In the aftermath of the pandemic, there have been increasing signs of the Japanification of China, which could threaten not only Beijing’s influence but also President Donald Trump’s efforts to rebalance international trade.
The 1990s will forever be etched in time as the “lost decade” for Japan.
During this period, which coincided with the Asian Crisis, Tokyo suffered a tsunami of economic challenges, including deflation, slowing growth, near-zero interest rates, soaring public debt, weak consumer demand, and zombie companies (indebted businesses that survived on cheap credit). Back then, Japan also grappled with an aging population and a shrinking workforce, issues that remain prevalent in today’s economic climate.
Has Japan ever fully recovered from this horrendous period? Not quite. Fast forward to the present, and Japan is facing a plethora of old and new problems, primarily inflation, rising interest rates, and an aging population. The annual inflation rate is hovering around 3%, long-term government bond yields are above 2%, and the Bank of Japan has raised interest rates to their highest levels in nearly two decades. Additionally, almost one-third of Japan’s population consists of individuals aged 65 and older, a result of a combination of declining birth rates and increasing life expectancy.
While Japanese officials have become less gloomy about the nation’s prospects, the damage has been done, and its ranking as an economic superpower has gradually slipped. Germany is now the world’s third-largest economy, and Japan is struggling against India for number four.
In 2025, an economic malaise – a Japanification, if you will – is incrementally seeping into China.
Will the 2020s be the lost decade for China? Depending on who is being asked, some will say that China is mirroring Japan’s 1990s, while others will pontificate that the nation’s problems differ from what unfolded in Tokyo.
Concerns about price deflation have been mounting in China amid deteriorating consumer demand, with monthly rates coming in below 0%. Moreover, the producer price index, which measures prices paid for goods and services by businesses early in the supply chain, has been stuck in deflation since September 2022.
The People’s Bank of China and the central government have continually eased monetary and fiscal policy, with officials accelerating their efforts amid trade strife with the United States. From Beijing’s stimulus tools to the central bank’s interest rate cuts and reserve requirement reductions, policymakers are throwing everything but the kitchen sink to support the economy.
Red ink has flooded the country. While the central government maintains a mountain of IOUs, it is the local governments that have a noose hanging around their necks. Beijing has stated that it will not bail them out, which poses a challenge because the appetite for muni-bonds has severely eroded. Like Japan decades ago, China has long suffered from a zombie apocalypse, with local firms struggling to stay afloat and barely surviving. In many cases, these companies are acquired by large corporations at the government’s behest.
On the real estate front, who could ever forget about Evergrande? The collapse of China’s property market – both residential and commercial – continues to impact the country’s growth prospects.
Finally, there’s an issue afflicting the rest of the world: a shrinking population. In recent years, China has reversed its policies aimed at containing the population, whether by abandoning its one-child policy or implementing measures to stimulate the birth rate. China’s population numbers reached their zenith in 2021 and have been steadily declining, emulating Japan’s aging crisis.
As the saying goes, if China catches a cold, the global economy contracts pneumonia. It makes sense, considering that Beijing accounts for approximately one-third of the worldwide GDP growth. Emerging markets, particularly commodity exporters, rely heavily on China’s demand for raw materials. Should investors lose confidence in China, a collapse in equities would materialize, triggering capital flight and market instability.
President Trump’s vision for the international marketplace would also be harmed.
A chief objective behind the president’s tariff agenda is to rebalance global trade, transforming the United States into a lead producer and the rest of the world, including China, into a consumer. If Chinese consumers are not buying anything now, then why would they if their economy slows or contracts? Treasury Secretary Scott Bessent even stated during his confirmation hearing earlier this year that China is in a recession, if not a depression.
This is a double-edged sword, of course. On the one hand, the Japanification of China would make officials more vulnerable, potentially forcing them to accept trade terms that favor the United States. On the other hand, if the lost decade – or decades – come to China, it would disrupt the global economy. At this point, the only thing economic observers and investors can do is wait, hold their families close, and determine if the 1990s will be repeated in the 2020s or 2030s.