Asset Bubbles : Comparing Japan & China

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The economies of Japan and the United States have both experienced severe housing bubbles and the aftermaths of the collapses in their bubbles economies while the current situation in China is very similar to Japan “pre‐burst” period. N’ Diaye (2010) mentioned in his paper that the Chinese economy today shares many similarities with the Japanese economy of the 1980s. Fukumoto and Muto (2011) also believe that the current stage of China’s development is similar to Japan pre-burst period but they think that the current situation in China is much closer to Japan’s 1970s (or even earlier) rather than its late 1980s. Every single bubble has its own similarities with others, but there must be structural differences exist in each bubble of every country. While each financial crisis no doubt is distinct, they also share striking similarities, in the run-up of asset prices, in debt accumulation, in growth patterns, and in current account deficits. (Reinhart and Rogoff, 2008)

The bubble economy experienced by the United States and current situation in China will be used to compare with the asset prices bubble once experienced by Japan. These two cases may help us understand the basic features of the formation of bubbles or actions that are necessary to prevent or alleviate bubbles.

Similarities (US and Japan)
There are indeed great similarities between the US subprime loan crisis and Japan “Lost Decade”. The graphs in Ueda (2010) research paper revealed the similarities of Japan and America’s bubbles in the property prices, stock prices and growth in domestic credit. Many research papers have also pointed out that the causes of the bubbles in Japan and USA are parallel. Monetary policies and bank loan behaviors of Japan (1985 -1995) and USA (1990 -2008) are alike. The Bank of Japan ran an excessively loose monetary policy for most of the 1980s. In the US, the Federal Reserve (Fed) did the same thing beginning in the late 1990s. In both cases, excess money supply and too much liquidity fueled the boom in asset price that led to major bubbles. (Yoshino, Nakamura and Sakai, 2012) Referring to the policy research by Randazzo, Flynn and Summers (2009), the behavior of the respective governments, their financial systems, and investor attitudes leading into and surrounding the bubble collapses in both Japan and US is similar in three critical ways: (1) Overly aggressive behavior of financial institutions and poor risk management that ignored basic economic trends, (2) Monetary policy errors and (3) Other destructive government policies. The response of US towards the recession caused by sub-prime loan crisis 2008 also shows similarity with the response used by Japan in their 1990s in the aspect of government spending through infrastructure “investment”. (Randazzo, Flynn and Summers, 2009) During the 1990s, Japan passed 10 fiscal stimulus packages, focused largely on public works, totaling more than ¥120 trillion ($1.4 trillion in today’s dollars) while the United States has started down a similar path as Japan in their fiscal stimulus. President Barack Obama and Congress are piecing together a stimulus package to spend around $50 billion on transportation infrastructure projects, and potentially another $500 billion on other public works projects. (Randazzo, Flynn and Summers, 2009) Mattingly and Hofschire(2012) stated that this pronounced similarity to the Japanese experience however represents the biggest threat of a Japan-like outcome for the U.S. In addition, there are also study that shows the current U.S. economic conditions (2012) have similarities to post-bubble Japan; most notably, the aftermath of a real-estate-focused financial crisis and deflationary pressures from deleveraging. (Mattingly and Hofschire, 2012)

Differences (US and Japan)
While Japan’s asset collapse in the late 1980’s and early 1990’s draws many similarities with the United States Financial Crisis in 2008, the two crises also had many differences. One...
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