AUGUST 13 — For years, the phrase “Japan’s Lost Decades” has been invoked as a cautionary tale for China—a prophecy of stagnation, deflation, and demographic decline. A recent research, which analysed Japan’s economic development through both expenditure and value-added models using World Bank data, suggests that this narrative is not only incomplete but potentially misleading.

The conventional wisdom is that China is repeating Japan’s mistakes: an investment-heavy growth model, a collapsing property bubble, and an aging population that threatens to drag the economy into permanent slowdown. But the findings from the paper point to a more nuanced reality. Japan’s “lost decades” were not a period of economic failure — they were a period of quiet, often overlooked transformation.

The paper’s econometric analysis reveals what actually powered Japan’s post-war miracle and sustained its economy through the turbulent 1990s. In the expenditure model, personal consumption and investment emerged as the dominant drivers of growth — not government spending or exports, as many assume. Meanwhile, the value-added model identified two critical factors that Japan got right: labour force participation and service sector productivity.

Herein lies the first lesson for China. When Japanese policymakers confronted stagnation, they didn’t just throw money at the problem through fiscal stimulus — though they did plenty of that. They focused on structural reforms that ultimately raised living standards and maintained social stability. The result? Despite flat GDP growth in dollar terms, Japan today boasts some of the world’s highest living standards, longest lifespans, and most cutting-edge industries.

The comparison between China today and Japan in the 1990s is tempting but flawed. Yes, both countries face macroeconomic imbalances: excessively high savings rates, low private consumption relative to GDP, and over-reliance on investment. Yes, China’s population structure in 2020 eerily resembled Japan’s in 1990. And yes, both economies have responded to crises by doubling down on industrial policy and manufacturing exports — a strategy that, in Japan’s case, exacerbated deflationary pressures.

But the differences are more telling. China is still a developing economy with more room for convergence-based growth. Its urbanisation process is ongoing, providing a demographic buffer that Japan lacked. Perhaps most crucially, China’s geopolitical weight makes it a far more formidable player than Japan ever was — a fact that both motivates US technological restrictions and gives Beijing broader global leverage.

The research suggests that the most important lesson for China is not how to avoid Japan’s path, but what to learn from Japan’s adaptation. Japan’s experience demonstrates that GDP growth alone is an inadequate measure of economic health. The “lost decades” were marked by steady — if incremental — improvements in productivity, service sector sophistication, and quality of life.

The key takeaway for Chinese policymakers is this: structural reforms that enhance productivity and labour force participation matter more than headline growth rates. Japan’s failure to raise its potential growth rate through Abenomics and other stimulus measures underscores that demand-side policies have at best temporary effects. The real work lies in supply-side reform: improving the service sector’s productivity, raising labour force participation among older workers and women, and creating a robust social safety net that allows households to reduce their excessive precautionary savings.

Perhaps it’s time to retire the term “Japanification” as a warning and start treating it as a playbook. If China can trade a point of GDP growth for fuller wallets, better services, and a more resilient social fabric, that may not be a bad bargain. Japan’s “lost decades” were a period of relative social peace, low unemployment, and steady technological advancement — not the economic apocalypse that the conventional narrative suggests.

The question for China is not whether it will follow Japan’s path — that horse has likely already left the barn. The real question is whether Beijing can learn from Tokyo’s successes and mistakes to build an economy that delivers stability, innovation, and quality of life even in an era of slower growth. Our research suggests that the answer lies in boosting service sector productivity, strengthening labour market participation, and finally addressing the consumption-investment imbalance that has haunted both economies for decades. Japan’s experience offers a roadmap, not a warning.

* Professor Datuk Dr Ahmad Ibrahim is affiliated with the Tan Sri Omar Centre for STI Policy Studies at UCSI University and is an Adjunct Professor at the Ungku Aziz Centre for Development Studies, Universiti Malaya. He can be reached at ahmadibrahim@ucsiuniversity.edu.my

** This is the personal opinion of the writer or publication and does not necessarily represent the views of Malay Mail.