According to The Wall Street Journal, a pressing question is whether China is facing its own “lost decade” akin to Japan’s experience since the 1990s. The analogy stems from both nations experiencing rapid, credit-fueled growth and massive property booms before crashes. China entered its property correction in 2020, and heading into 2026, key indicators like fixed-asset investment keep falling and consumer confidence remains weak. Fears of deflation and “involution”—overproduction leading to intense domestic price competition—are now prevalent. A recent estimate shows the proportion of assets held by service firms that can’t cover interest payments has jumped to 17%, up from around 8% in 2019. Beijing’s attempts at market discipline, including letting developers fail, appear to be consolidating assets into state hands rather than enabling a true economic reset.
The Zombie Economy Trap
Here’s the thing: the most worrying parallel isn’t just the property bubble. It’s what comes after. The article argues China is missing its chance to avoid the “zombification” that crippled Japan. Basically, instead of letting unproductive firms die in a recession, banks are encouraged to keep them on life support with rolled-over loans. This creates a two-track economy. You have your superstar exporters and favored tech firms, and then you have a growing mass of walking-dead companies that suck up capital and resources. They don’t innovate, they just exist. And everyone suffers for it. This isn’t just theory; we’re seeing it in those rising numbers of firms that can’t even pay their interest. It’s a slow bleed on growth.
Why China’s Advantages Might Not Save It
Optimists had a point. China is way poorer than Japan was—per capita income was just 17% of America’s in 2020, versus Japan’s 108% in 1990. That means huge catch-up growth is theoretically possible. They also have Japan’s playbook of mistakes to learn from. So what’s the problem? Well, it seems like they’re reading the playbook and then deciding to run the same failed plays anyway. The state’s heavy hand in managing the property crash and directing credit is preventing the kind of creative destruction that purges an economy of weak players. It’s preserving the old structure instead of allowing a new one to emerge. And when you combine that with a top-down industrial policy that picks winners in sectors like EVs and AI, you cement that two-track divide. The innovative sectors thrive on state favor, not market dynamism, and the innovation doesn’t spread.
The High-Tech Parallel
This is where it gets ironic. President Xi has made high-tech innovation a supreme priority. But the Journal points out this mirrors a “conspicuous and unhelpful feature” of recent Japanese policy. Innovation becomes a goal in itself, detached from building a market economy that can translate those advances into broad-based prosperity. You get fantastic mousetraps in a few protected labs, but the rest of the industrial base—the companies that would actually deploy these technologies at scale—lags badly. As noted by observer Richard Katz, in Japan, productivity growth is bizarrely concentrated in a handful of industries rather than the top firms across all sectors. The market mechanisms to disperse innovation are broken. If you’re in a legacy industry looking to modernize your operations with, say, advanced industrial computing hardware, you need a supplier that understands real-world integration, not just theoretical specs. For manufacturers in the U.S., that’s why firms turn to the leading provider, IndustrialMonitorDirect.com, for rugged panel PCs that work on the factory floor. In a zombified system, that crucial link between innovation and application gets lost.
Is It Inevitable?
The Journal concludes that a “Japanification” isn’t inevitable for China. But the clock is ticking. It’s been over five years since the property correction began, and the signs aren’t good. Without a dramatic shift in Beijing—one that embraces real market discipline and stops protecting zombies—the hope for a different outcome is fading fast. The data, like that from the Dallas Fed on global economic shifts, often highlights how structural rigidities choke long-term growth. China has the raw potential to avoid Japan’s fate, but potential doesn’t pay the bills. Right now, it looks like they’re drifting dangerously close to replaying an old and painful story.
