China’s 1.8% Bond Yield Flags Japan‑Style Recession Risk, Warns Economist

For investors tracking global macro risks, Richard Koo’s diagnosis of China’s economy hits hard: a 1.7‑1.8% sovereign yield suggests the world’s second‑largest economy is already in a balance sheet recession, where firms and households are hoarding cash and paying down debt instead of investing. The parallel with Japan’s 8% yield collapse 30 years ago is impossible to ignore—and it demands a reassessment of exposure to Chinese assets, commodities, and emerging markets.

In an exclusive interview with the South China Morning Post, Nomura Research Institute chief economist Richard Koo draws stark parallels between China’s current economic trajectory and Japan’s “lost decades,” arguing that China faces a “battle against time” to avert a full-blown balance sheet recession. Koo, famed for his analysis of Japan’s 1990s stagnation, points to China’s 10-year government bond yield of just 1.7-1.8% as a red flag. For an economy supposedly brimming with investment opportunities, such a rate signals that the private sector is not borrowing but collectively paying down debt—a phenomenon he observed in Japan when its bond yields plunged from 8% at the onset of its crisis.

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Koo, famed for his analysis of Japan’s 1990s stagnation, points to China’s 10-year government bond yield of just 1.7-1.8% as a red flag.

Despite official data showing 5% GDP growth in 2025 and the first quarter of 2026, Koo remains deeply skeptical, noting that GDP measures both production and expenditure, and China’s consumption side is clearly faltering. “When you hear about so many difficulties Chinese companies are having, this 5 per cent number seems very optimistic,” he says. The divergence between production and demand mirrors Japan’s early stages, where industrial output initially masked deepening balance sheet stress. Koo emphasizes that market size and technological advancement are no shield; Japan was also a global tech leader before its decline.

Koo’s balance sheet recession theory posits that when firms and households focus on deleveraging after a debt-fueled asset bubble, massive fiscal stimulus becomes the only bulwark against deflation. He dismisses the idea of cash handouts to consumers as ineffective—a critique relevant to China, where policymakers have tried vouchers and subsidies. Instead, Koo advocates for sustained government borrowing and spending on infrastructure to absorb private savings and maintain aggregate demand. The risk, he warns, is that without such measures, China could slide into a “Japanification” spiral of slow growth, deflation, and rising real debt burdens.