In November 2024, the yield on China’s 30-year government bond fell below its Japanese equivalent for the first time. This was a big deal in financial markets, fanning fears that China’s economy was vulnerable to the type of crisis that condemned Japan to decades of deflation and stagnant growth following the bursting of its asset price bubble in the early 1990s.

In November 2025, China’s benchmark 10-year yield followed suit. Although the convergence in the two countries’ bond yields had as much to do with Japan’s success in winning a three-decade battle against deflation, the “Japanification” of China’s economy has been one of the most talked-about themes among economists and investors in the past several years.

In a report in August 2023, JPMorgan said there were some eerie similarities between post-property bust China and 1990s Japan. The bank pointed to the structural causes of both countries’ housing crises, the scale and speed of the increase in financial imbalances as well as acute demographic pressures.

However, JPMorgan said there were crucial differences, too. China has a bigger domestic market, a lower urbanisation rate and more catch-up growth potential, giving it more levers to pull to reflate the economy. Moreover, China’s state-controlled financial system makes it so “the probability of a sudden-stop debt crisis is smaller”.

Fast forward three years, and the debate over whether China is turning Japanese continues to rage amid increasing signs that domestic demand is deteriorating. In the first nine months of this year, retail sales of consumer goods grew a meagre 1.1 per cent in annualised terms. Fixed asset investment contracted 7.2 per cent in the first nine months of 2026 while property investment fell 20.6 per cent.

In a report on October 7, Citigroup said China’s “domestic economy is on the verge of recession”. The bank’s domestic demand tracker has fallen below its pandemic-era low. It said the “weakness is broad-based, cutting across households, government and corporates”.

Furthermore, credit growth has collapsed, expanding at its slowest pace on record as households and businesses remain reluctant to take on debt. China’s 10-year bond yield, which almost hit 2 per cent last year as many investors rotated into stocks, has fallen back to a record low of 1.6 per cent.

Yet if comparisons with 1990s Japan were flawed on multiple counts three years ago, the Japanification of China is an even less plausible narrative today. If the world’s second-largest economy is enduring a “lost decade”, why were exports up 36 per cent last month, with shipments of hi-tech goods up 64 per cent, accounting for nearly half of China’s total export growth?

When Japan’s bubble burst, its once formidable manufacturing sector withered. The country’s share of global manufacturing value added fell from 23 per cent in 1995 to 11 per cent by 2010. China’s share, by contrast, rose to 28 per cent by 2024. In fact, manufacturing capital expenditure has increased 45 per cent since the housing crisis erupted in 2021.

In a report in June, Macquarie said Japan’s manufacturing capital expenditure fell 14 per cent from 1990 to 2010, which “helps explain why Japan missed much of the subsequent waves of technological change in the internet and semiconductors”. Chinese manufacturing, on the other hand, “has benefited from a weak yuan, significantly lower labour costs, sustained credit expansion and rising [research and development] spending”.

While Japan was a single-speed economy that stagnated for decades following the bursting of its asset bubble, China is an indisputably two-speed one in which, in the words of the International Monetary Fund, “the deficiency of domestic demand has been mitigated by strong export growth”, leading to “technological advances and gains in international market share”.

Last quarter, China’s carmakers outsold their Japanese rivals in Europe for the first time over a full quarter, accounting for 12.7 per cent of total sales in the region. The artificial intelligence (AI) boom, moreover, has been a strong tailwind for China’s economy, accentuating the country’s role as a manufacturing hub for the AI buildout. Barclays expects AI exports to add 0.5 percentage points to economic output this year.

It is only in the domestic economy where the Japanification narrative carries weight. Macquarie said China’s consumer stocks “trade at depressed valuations that imply a Japan-style ‘lost decades’ scenario”. Even so, the persistent weakness of consumption is largely policy-induced as Beijing steers the economy away from property-led expansion to tech-driven self-reliance.

The danger is not the Japanification of China as the AI-driven export boom acts as a crucial counterweight to weak consumption. Rather, the threat is in the lack of urgency in rebalancing the economy. “Export resilience has given Beijing room to maintain its tech-first policy framework despite weak domestic demand,” Morgan Stanley said.

Comparisons between post-bubble Japan and today’s China are inapt, in part because of the sharp divergence in the performance of both countries’ manufacturing sectors. It is the domestic consequences of China’s export boom that are partly to blame for prolonging the debate over Japanification.