Global economists are observing concerning parallels between China’s current economic predicament and Japan’s catastrophic collapse three decades ago. While China’s skyline gleams with modern architecture and its electric vehicle industry dominates global markets, the nation stands at an economic precipitude mirroring Japan’s disastrous bubble burst in the early 1990s.
The comparison reveals striking similarities in underlying mechanisms. Japan’s crisis, as analyzed by leading economic thinkers, emerged from a perfect storm of speculative excess, hidden debt burdens, and inadequate policy responses. Nobel laureate Paul Krugman’s liquidity trap theory described Japan as an economy whose nervous system had gone numb—zero interest rates failed to stimulate spending as traumatized households hoarded cash amidst deflationary expectations.
Richard Koo’s balance sheet recession theory provides deeper structural insight, explaining how corporations became technically insolvent despite operational profitability, diverting profits toward debt repayment rather than expansion. Meanwhile, Richard Werner’s analysis in “Princes of the Yen” blamed the Bank of Japan’s credit control mechanisms for directing capital toward speculative sectors and deliberately allowing the bubble to burst.
China now demonstrates alarming resemblances to pre-collapse Japan. The property sector, once China’s growth engine, has become a massive drag with developers like Evergrande symbolizing a bursting bubble far exceeding Japan’s experience. Middle-class families with approximately 70% of wealth tied to real estate feel increasingly poorer as housing prices decline, creating consumption slowdowns and deflationary pressures.
China’s advantages include its centrally managed economic system, which maintains firm control over banking sectors and can instruct state-owned banks to support strategic industries. The country also retains urbanization potential absent in 1990s Japan. However, China faces unique challenges including demographic pressures of “getting old before getting rich,” fragile social safety nets, and rising geopolitical tensions with Western technology restrictions and trade barriers.
President Xi Jinping’s promised “proactive” macroeconomic stance for 2026 includes large-scale stimulus through government bonds, consumption trade-in schemes, and massive infrastructure investments. While theoretically addressing both Krugman’s liquidity trap through demand boosting and Koo’s balance sheet recession through government acting as borrower of last resort, execution risks remain critical. If stimulus funds flow into unproductive projects, China may simply accumulate new bad debt atop existing obligations.
Without comprehensive structural reforms, strengthened social safety nets, and transparent resolution of local government debt, China’s current measures may function merely as painkillers rather than cures. The global economy has significant stake in China learning from Japan’s experience—not in preventing bubble bursts (which has already occurred), but in acknowledging losses quickly and distributing them strategically for economic reset. How China navigates this crisis will determine whether it avoids Japan’s lost decades or enters its own prolonged economic stagnation.