Is China heading toward Japan’s ‘Lost Decades’? Yuan surge raises fears

China’s rapidly appreciating yuan is triggering fresh concerns among economists and market analysts, with many warning that Beijing could be drifting toward the same economic trap that pushed Japan into decades of stagnation.

The Chinese currency has climbed to its strongest level in more than three years amid a weakening US dollar, resilient exports and Beijing’s aggressive push to internationalise the yuan. Global financial institutions including Goldman Sachs, UBS and Bank of America have projected further gains in the Chinese currency.

However, the yuan’s rise is also reviving memories of Japan’s experience after the 1985 Plaza Accord — a landmark agreement in which the United States and its allies pushed for a stronger Japanese yen to reduce America’s trade deficit with Japan.

The yen’s sharp appreciation initially symbolised Japanese economic strength but eventually damaged export competitiveness, weakened manufacturing growth and fuelled massive stock and property bubbles. When those bubbles burst in the early 1990s, Japan entered what became known as the “Lost Decades” — a prolonged period of weak growth and economic stagnation.

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Analysts now fear China could face similar risks.

A stronger yuan makes Chinese exports more expensive for global buyers, potentially shifting manufacturing demand toward lower-cost economies such as India, Vietnam and Bangladesh. For China, long described as “the world’s factory," that poses a major structural challenge.

At the same time, Beijing is accelerating efforts to build an alternative global financial system centred around the yuan. One of the biggest pillars of that strategy is CIPS, China’s Cross-Border Interbank Payment System, which aims to reduce dependence on the Western SWIFT payment network and allow countries to trade directly in yuan instead of US dollars.

China has also expanded yuan-based energy trade with countries including Russia, Iran and Saudi Arabia, fuelling discussions around the emergence of a “Petroyuan” system to challenge the dominance of the US petrodollar.

Still, Beijing faces a delicate balancing act. China wants greater global influence for the yuan without losing control over its financial system. Unlike Japan during the Plaza Accord era, China maintains strict capital controls and tightly manages its exchange rate through the People’s Bank of China, allowing Beijing greater control over currency appreciation.

But economists warn that history offers a powerful lesson: a rising currency may project economic power, yet excessive appreciation can eventually weaken the export engine that built that power in the first place.