China’s government bond yields have plummeted to historic lows, sparking concerns about a potential prolonged economic downturn reminiscent of Japan’s “lost decades.” This decline in yields, falling below levels observed during the 2008 financial crisis and the COVID-19 pandemic, raises questions about the future of the world’s second-largest economy.
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Record Low Yields and Growing Concerns
The yield on China’s 10-year government bond has dropped below 1.6% for the first time, significantly diverging from US bond yields by 300 basis points. The 2-year yield hovers near a record low of 1%, while the 30-year yield has fallen below that of Japanese Government Bonds for the first time in history. This widespread decline has analysts drawing parallels to Japan’s economic stagnation following the burst of its asset bubble in the 1990s. The “lost decades” saw prolonged deflation, economic slowdown, and a significant drop in the Nikkei Index.
Parallels with Japan’s Economic Stagnation
Similar to Japan’s experience, China is grappling with a weakening property sector, sluggish domestic consumption, and high levels of government and private debt. These shared challenges raise concerns about a potential deflationary spiral, where businesses and consumers prioritize debt reduction and savings over investment and spending, further dampening economic activity. While China’s rapid economic growth over the past two decades contrasts sharply with Japan’s stagnation, the similarities in their underlying economic vulnerabilities are undeniable.
Averting a “Japanification” Scenario
Analysts at Goldman Sachs, while acknowledging the increasing similarities between China and Japan, suggest that a “lost decades” scenario for China is not inevitable. They emphasize the need for decisive policy interventions to alter China’s economic trajectory. These include aggressive easing of financial conditions, rationalizing supply, and stimulating aggregate demand. Such measures, they argue, are crucial to breaking the potential downward spiral that characterized Japan’s prolonged economic slump.
Stimulus Measures and Market Performance
Despite a series of stimulus measures implemented by Beijing since September, which initially boosted stock markets, the year 2025 has seen a lackluster start for Chinese equities. The CSI 300 index has experienced its worst start in nearly a decade, declining by almost 4%. This underscores the challenges facing China’s economy and the limitations of current stimulus efforts in reversing the concerning trends. The effectiveness of future policy interventions will be critical in determining whether China can avoid a prolonged period of economic stagnation.
Conclusion: A Critical Juncture for China’s Economy
The dramatic decline in China’s bond yields signals a critical juncture for the country’s economy. While the parallels with Japan’s “lost decades” are concerning, decisive policy action could potentially avert a similar fate. The coming months will be crucial in observing the effectiveness of China’s response and whether it can successfully navigate these economic challenges. The global economic implications of China’s economic performance underscore the importance of these developments.
