China’s Real Estate Downturn Echoes Japan’s Lost Decade

A new study by Kenneth Rogoff and Yuanchen Yang compares China’s ongoing real estate adjustment to Japan’s post-bubble stagnation of the 1990s. Using city-level data from nearly 300 Chinese cities and 47 Japanese prefectures, they find striking parallels in investment dynamics and consumption responses. Overinvestment during the housing boom created excess supply that weighs on the economy long after prices peak. In China, roughly 70% of household wealth is tied to housing, and a nationwide price correction could reduce consumption by 2-4 percentage points of GDP. Sentiment amplifies the downturn: pessimistic expectations delay purchases and raise precautionary savings. Unlike Japan, China has stronger productivity growth in sectors like EVs, renewables, and AI, but it faces faster aging and weaker social safety nets. The authors argue that avoiding a banking crisis is insufficient; accelerating the unwinding of excess supply and strengthening social insurance are critical. The window for effective policy intervention is narrowing as overcapacity, weak consumption, and negative sentiment reinforce each other.