China’s strategy of increasing debt issuance to stimulate the economy mirrors Japan’s reliance on public spending and debt during its “Lost Decade.” In response to a faltering economy, the Japanese government repeatedly increased public investment, hoping to jumpstart growth through infrastructure projects and other short-term measures. While these efforts provided a temporary boost, they ultimately failed to address Japan’s deeper structural issues.
Similarly, China’s response to its current economic slowdown has been to offer more debt to local governments and provide subsidies to low-income households. These measures, however, merely shift financial pressures rather than solve the systemic problems at hand. Much like Japan’s experience, China is seeing diminishing returns on its debt-fuelled investments, particularly in sectors like infrastructure and real estate, where growth has stalled. Rather than boosting productivity or fostering innovation, much of this investment has gone into projects that are no longer generating substantial economic value.
Japan’s public debt soared as the government continued to spend on projects that offered little long-term economic benefit. China is now facing the same dilemma. The over-investment in real estate and large-scale infrastructure projects has created vast areas of underused or unfinished development, a sign of inefficient capital allocation.
These projects might or might not inflate short-term growth figures but do little to contribute to the broader economy’s health. The danger for China is clear: continuing to rely on debt to stimulate growth will only lead to a deeper financial burden, much like what Japan faced when its economic model stopped working.
The Absence of Structural Reforms: Learning from Japan’s Mistakes
Japan’s economic stagnation in the 2000s stemmed from the government’s failure to introduce the structural reforms needed to revitalise its economy. Rather than transitioning to a more sustainable growth model, Japan clung to the same debt-driven, state-supported approach that had once fuelled its rapid growth. As a result, the economy languished, unable to generate meaningful productivity gains or escape deflation.
China now finds itself in a similar position. The Chinese government has repeatedly avoided addressing the core issues in its economic structure, particularly around capital allocation. While China’s production sectors may be privatised, capital allocation remains tightly controlled by the state through local governments, state-owned banks, and heavily regulated financial institutions. This has led to inefficient investments, especially in real estate, and left the country vulnerable to growing financial risks.
Much like Japan’s refusal to reform its financial and industrial sectors, China is resisting the kinds of reforms that could unlock long-term growth. The property market, which is deeply intertwined with local government finances, is now under strain as growth slows and real estate prices decline. But instead of reforming the sector or addressing the role of state-controlled capital in misdirecting investment, the government is simply shifting debt from local governments to the central government. This is a short-term fix that avoids tackling the structural issues head-on—just as Japan avoided deep reforms and paid the price with decades of stagnation.
The Renminbi: China’s Missed Opportunity to Rebalance
In the early 2000s, Japan struggled with deflation and economic stagnation, partly because it was slow to adjust its currency policies. China now faces a similar challenge.
If China is truly moving towards structural stagnation, as many indicators suggest, a logical response would be to allow the renminbi to weaken. However, the Chinese government has resisted such a move, fearing the political and social consequences of admitting that the economy is under pressure. By maintaining an artificially strong currency, China is effectively tightening its monetary policy at a time when it should be loosening it to combat deflationary pressures.
This refusal to let the renminbi adjust naturally mirrors Japan’s earlier hesitance to allow market forces to influence its currency and monetary policy. In Japan’s case, the failure to address deflation aggressively contributed to years of economic stagnation. In China, keeping the renminbi strong only worsens the challenges faced by the domestic economy, particularly in the property sector, where prices are falling, and debt is rising. Without a more flexible approach to its currency, China risks deepening its economic malaise, just as Japan’s failure to act led to a prolonged period of stagnation.
Xi Jinping’s Ideology: The Barrier to Reform, Just as in Japan
Japan’s stagnation was prolonged by the country’s political and bureaucratic resistance to reform. Japan’s leadership, reluctant to give up the old economic model that had once driven its success, clung to outdated policies long after they stopped working. In China, a similar dynamic is playing out under Xi Jinping’s leadership.
Xi’s commitment to state control over the economy, driven by his Marxist and Maoist ideology, is preventing the reforms that are necessary to revitalise China’s growth. While earlier Chinese leaders, such as Deng Xiaoping, embraced economic liberalisation and reform to unleash China’s growth potential, Xi has taken a different path. His administration has been rolling back many of the market-oriented reforms that were introduced in the 1990s and 2000s, instead favouring greater state control over key sectors of the economy.
Much like Japan’s unwillingness to break away from its debt-driven model, Xi’s insistence on maintaining tight control over the economy is limiting China’s ability to adapt to new challenges. The reluctance to reform capital allocation, liberalise financial markets, or allow the renminbi to weaken are all signs of a government more concerned with maintaining control than with fostering economic growth. This ideological resistance to reform is exactly what kept Japan from escaping its own economic stagnation, and China risks a similar fate unless it changes course.
Conclusion: China is Repeating Japan’s Lost Decades
The parallels between China’s current economic situation and Japan’s long period of stagnation are difficult to ignore. Both economies experienced rapid growth followed by a slowdown driven by deep structural issues, and both governments have relied on debt and short-term stimulus to try to restore growth. In Japan, these policies failed to address the root causes of the economic slowdown, leading to decades of weak growth and rising debt. China is now heading down the same path.
Without addressing the structural issues in its economy—particularly around capital allocation, real estate, and currency policy—China risks becoming trapped in a prolonged period of stagnation, much like Japan experienced. President Xi Jinping’s ideological commitment to state control is preventing the kinds of reforms that could set China on a more sustainable growth trajectory.
Unless China breaks free from this pattern and implements meaningful reforms, it will continue to face economic decline and rising financial instability. The lessons from Japan’s Lost Decade are clear, but China’s leadership appears to be repeating the same mistakes.