China will experience the same bubble as Japan met in 1980s

Topics: Inflation, Japanese asset price bubble, Monetary policy Pages: 7 (3791 words) Published: November 3, 2014

ChiINA IS EXPERIENCING A 1980S STYLE jAPANESE BUBBLE
Instructor: Prof. Milind Rao

06584315Group memeberYu JIANGYiqin LI
Zheng LI
Ping SONG
Anton VESELOV
Yan LI
Qingweimeng YU
1000000Group memeberYu JIANGYiqin LI
Zheng LI
Ping SONG
Anton VESELOV
Yan LI
Qingweimeng YU

Abstract
This article is going to compare the economy situation, including background, measurement took by government and phenomena, in 1980s in Japan and in 2000s in China. After the comparison, we find a lot of amazing similarities between these two periods and come to a conclusion that China is experiencing the same 1980s Japanese style bubble. Japanese bubble economy in 1980 In the late 1980s, on the heels of a three-decade long “Economic Miracle,” Japan experienced its infamous “bubble economy” in which stock and real estate prices soared to stratospheric heights driven by a speculative mania. Japan’s Nikkei stock average hit an all-time high in 1989, only to crash in a spectacular fashion shortly after, causing their real estate bubble to collapse and throwing the country into a severe financial crisis and long period of economic stagnation known as the “Lost Decades.”(Appendix 1) due to WW2,Japan suffered a tough economy, The president of US, Marshall ,planed to provide aid to rebuild Japan’s economy. The two countries improved relationship and created opportunities for Japan to export manufactured products to the US. Japanese industry gained its competitive edge by copying Western products, improving upon them and selling them back to the West for cheaper prices. By the 1970s and 1980s, Japan extended its domination to the global electronics industry as it manufactured the majority of the world’s consumer electronics products. The GDP increased from 300 trillion to 500 trillion during the ten years from 1850 to 1950(Appendix 2). By the 1980s, Japan’s GDP per capita rivaled or even surpassed many Western countries and the country became the world’s largest creditor nation. From the international perspective, Japan’s export played a relative important role in the GDP. However, in 1985, the Plaza Accord, an agreement between the governments of France, West Germany, Japan, the United States, and the United Kingdom, to depreciate the U.S. dollar in relation to the Japanese yen and German Deutsche Mark by intervening in currency markets(Appendix 3). The exchange rate value of the dollar versus the yen declined by 51% from 1985 to 1987.It made the foreign capital investments relatively inexpensive for Japanese companies and caused a disaster for Japan’s export. Under such circumstance, the government of Japan issued several policies to keep the economy growth rate from two aspects, fiscal policy and monetary policy. As to the fiscal policy, the government increased the spending on the construction of facilities and transportation, which had a multiple effect on GDP. And from the monetary policy, the Bank of Japan issued much more money to the market, M2 increased sharply from 1985 to 1995,as the graph showed (Appendix 4). By the end of August 1987, the BOJ signaled the possibility of tightening the monetary policy but decided to delay the decision in view of economic uncertainty. By 1989, Japanese officials became increasingly concerned with the country’s growing asset bubbles and the Bank of Japan decided to tighten its monetary policy. Trying to deflate speculation and keep inflation in check, the Bank of Japan sharply raised inter-bank lending rates in late 1989. (Appendix 5) This sharp policy caused the bursting of the bubble and the Japanese stock market crashed. Equity and asset prices fell leaving overly leveraged Japanese banks and insurance companies with books full of bad debt. The financial institutions were bailed out through capital infusions from the government, loans and cheap credit from the central bank, and the ability to postpone the recognition of losses, ultimately turning them into zombie banks. Yalman Onaran of...
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