>>502In a JRPG system, you lose characters permanently.
The problem with giving setbacks for losing is that playing well is rewarded with an easier game, whereas playing badly causes a snowball effect of sucking, to the point where you're restarting when you get hurt anyway, because if you didn't have the skill to dodge that bullet when at full health, now that your speed is permanently halved you hardly have much of a chance to dodge future ones.
A better way of doing it is having in-story consequences. Don't just black out the screen when I die. Show my opponent taking a celebratory shit in my mouth. Show my corpse dragged before the BBEG. Show my hometown slaughtered, the fields burnt and the sky blackened. Make me feel that my victory is not pre-ordained and that my screw ups have consequences for the game world.
These consequences should be as isolated from power level in gameplay as possible. If anything, they should give additional power, to aid me in my revenge (assuming I didn't die).