China's weak economic recovery since the pandemic has raised questions about the country's growth model. As a significant contributor to the world economy, China's fate has profound implications for global markets. Until now, China had adopted and perfected the East Asian growth model and risks following a similar path to Japan until the early 1990s when its economy fell into a deflationary trap. Similarities between Japan in the 1980s/90s and contemporary China abound, notably around high debt levels, weak domestic demand, worsening demographics and difficult external trade relations.

This paper examines the parallels and finds that China indeed shares many of the characteristics of “Japanification,” but also possesses many strengths to offset a similar trajectory which has plagued Japan’s economy for decades. In particular, government authorities in China have the resources to launch a credible proactive policy response to lift near-term growth expectations, as well as the ability to institute structural reforms to balance the demographic transition and property sector drag. Investors will be watching for those signals to be assured that Japanification will be averted.