Nobuo Ikeda's prediction comes true! Is China reenacting Japan's "Lost Two Decades"?

Japanese economist Ikeda Nobuo’s predicted scenario in “The Lost Two Decades” is now unfolding in contemporary China. As both a scholar and a media commentator, he provides an economic perspective rooted in the 2008 financial crisis, deconstructing the truth behind Japan’s economic stagnation with a disruptive view. The core question Ikeda raises continues to resonate: why did a powerhouse economy of the 1980s, dominating globally, fall into a state of confusion in just ten years? Even more troubling, China seems to be replaying this tragedy according to the same script.

The Curse of Prosperity: When Manufacturing Becomes an Economic Trap

Ikeda Nobuo reveals a cruel paradox in his book: the stronger Japan’s manufacturing sector, the more fragile its economy. In the 1980s, Japan’s automobile industry was astonishingly efficient, producing 22 million vehicles annually, yet domestic demand was only 6 million. This meant 16 million cars had to be exported, with the United States once serving as the largest buyer. But after the 2008 financial crisis, US demand halved from 17 million vehicles, instantly plunging Japan’s auto industry into trouble.

This exposes a fatal flaw Ikeda repeatedly emphasizes: the crux of the world economy lies not in supply but in demand. Many products can be made, but to whom should they be sold? Japan’s domestic market was insufficient, so exports were necessary, but export-led growth cannot be resolved by domestic monetary easing alone. Lowering interest rates has little relevance to the auto industry. This is precisely the dilemma China faces today—Pinduoduo’s IPO was accompanied by calls of “consumer downgrade,” eerily similar to Japan’s domestic demand contraction back then.

Ikeda introduces the concept of “GDP gap” to explain this predicament: GDP gap = potential growth rate - actual growth rate. In 2008, Japan’s real growth was -3.2%, while its potential growth was 1%, resulting in a gap of 4.2%. He uses a marathon runner analogy: if a sick runner completes a 3-hour marathon, medical help is useful; but if the problem is insufficient training or innate talent, even a doctor cannot help. That “innate talent” is demand, and the “doctor” is macroeconomic policy. If demand is fundamentally flawed, macro policies cannot solve the problem.

From Number One to Last Place: The Mystery of Productivity Collapse

The second truth Ikeda reveals is even more startling: Japan, renowned for diligence, saw its productivity decline to lower than that of lazy Italy by 2007. The reason was a crash in service sector productivity, plunging from 3.5% in the 1980s to just 0.9%. Since services account for up to 70% of GDP, this directly dragged down overall economic performance.

Ironically, Japan led the world in escaping the oil crisis in the 1980s through manufacturing dominance, while the US was mired in inflation. But in the late 1980s, Japan experienced a severe asset bubble, and after 1990, their fortunes completely reversed. Ikeda incisively points out: while the US was pioneering the internet and computers, Japan was playing with houses. As a result, the US led the internet revolution, and Japan fell into twenty years of lost decades.

Japan did make efforts to catch up—brands like NEC initially remained competitive. But Ikeda notes Japan merely imitated the “face” of America’s industry without adopting its “essence,” failing to achieve structural industry adjustments. The key to sustainable innovation was not rooted in Japan. Its global competitiveness in ICT industry even lags behind Taiwan and South Korea.

The Three Deadly Traps Revealed by Ikeda Nobuo

In “The Lost Two Decades,” Ikeda summarizes the core reasons for Japan’s economic collapse:

Collapse of Domestic Demand Trap: Savings rate dropped from above the US to below, aging population led more people to rely on pensions, leaving little investment demand domestically.

Industrial Upgrade Failure Trap: Aspiring to upgrade but unable to adjust, trying to return to previous levels but finding labor costs ten times those of developing countries, losing competitiveness entirely.

Labor Market Rigidity Trap: Lifetime employment system locked middle-aged and older workers in their positions, suppressing upward mobility for young people, preventing talent from flowing into emerging industries.

Lifetime Employment System: Institutionalized Generation Plundering

Ikeda’s sharpest critique focuses on the labor market. Japan’s excessive protection of regular employees, through lifetime employment, has worsened social inequality and hindered industrial restructuring. Without a proper pricing mechanism for talent, workers are trapped in a single company, losing enthusiasm and healthy competition. Emerging industries cannot attract top talent, stunting development.

More alarmingly, lifetime employment has become a tool to oppress the younger generation by the older. They entered companies for historical reasons and are now defending their positions. Thus, post-1980s Japan has been living in frustration, venting through blogs and complaints. Since 2000, resource competition between young and middle-aged or older generations has intensified. Ikeda points out that although discussions of reform appeared then, vested interests blocked the only chance for change.

The Japanese government considered three measures: relocating factories overseas, replacing full-time workers with temporary labor, and currency devaluation. For example, many Japanese firms established operations in Dalian, bringing workers from Japan who earned comparable wages, but China’s cost of living is only one-tenth of Japan’s. This was an indirect import of labor, resulting in excess labor supply and declining wages.

The Repeating Script in China

The scenario depicted by Ikeda Nobuo in “The Lost Two Decades” is strikingly similar to today’s China. Japan was 30 years ahead of us; in the past decade, China has just been repeating Japan’s story from 90 years ago: a housing market boom, soaring exports, currency appreciation, an aging population. The same concern applies—insufficient domestic demand. The market space was originally much larger than Japan’s, but people are spending all their money on real estate, leaving little for consumption.

Ikeda pointed out that in Japan, the savings-investment balance equaled current account surplus; with savings shrinking sharply, the current account surplus also decreased, and Japan’s exports and imports no longer profit. The previous model of “insufficient domestic demand offset by exports” has completely collapsed. This is precisely the path China must be vigilant against.

Ikeda’s predictions have already partially come true. When a country’s youth lose hope, and innovation is strangled by rigid systems, and real estate monopolizes all resources, the decline is no longer a question of if but when. Japan proved over 20 years that even a good hand can be played poorly.