Is China Experiencing a ‘1980s Japanese Style Bubble’?

ECON 5200

Is China experiencing a ‘1980s Japanese style bubble’?

Group 3

Japan story

• 1985-1989 Japan experienced an economic bubble period

In 1985, strongly influenced by US policy, the Japanese Yen was forced to be appreciated. The exchanged rate vs. USD was up-valued accordingly, and the Net Exports of Japan reduced sharply.      

Money supply increased and Interest Rate decreased:

During this period, in response to the negative impact of Japanese Yen appreciation and the reduction in Net Export, Japan decided to increase the domestic investment and consumption by increasing money supply with lowering interest rate in order to stimulate the economy. Bank loans were mostly invested in Property, Land and stock market. With the USD depreciated, foreign capital invested in Japan’s property market as well; further raising Japan’s property and land price. During 1985-1988, the loan was doubled. As a result of increased money supply and the lower interest rate, the property and land market as well as stock market prices were stimulated greatly, GDP grew very fast from 1985 to 1989 due to the active economic activities. However, the economic bubbles were also built up during this period.

• 1990-1995 Japan’s economic bubble collapse

Money supply decreased and Interest Rate increased:

Since 1989, to prevent the economic bubbles from continuing to grow bigger, Japan government took an aggressive action to intervene the market. The interest rate was increased and money supply started to decrease, government released policies to restrict the financing through Real Estate. Property, Land market and the stock market prices turned around and reduced sharply as a direct reaction. Banks’ bad loans increased and the total social credit system run into chaos, the economic bubble collapsed quickly because of the sudden intervention of monetary and fiscal policies, GDP was reduced during this period.