The Red Dream

Chapter 8Japanese Bubbles

Before long we'll probably find a body of a China donkey under the cliff.

—Reflecting on Aesop, a Chinese professor, October 2018¹

With so much leverage already built into the system, a growing fiscal deficit, and inflating the problem away a no-starter, what policy choices does Beijing have? Given the attitude evinced by the official quoted at the head of Chapter 9, there is no need for choice at all; standing pat on the structure of the current system is enough. And perhaps the Chinese professor quoted above is correct. To shed a bit more light on this problem this chapter examines the case of Japan in the 1990s. Japan went through eight years of serial banking crises exacerbated by the bursting of a massive real estate asset bubble. Although their economies are quite different, Japan's experience shares some important similarities with China and might suggest ways China could adopt to resolve its own problems. Added to shared problems now are the rapidly aging populations in both countries. The costs of an aging population will add significant pressures to both fiscal systems and, in China, will create fiscal deficits that current budgetary arrangements will not be able to support. With growing deficits and declining household deposits something will have to change.

Bubbles and Japan's Banking Crisis of the 1990s

In Japan, a banking crisis came first, and then the bubble burst, making the crisis far worse. But what dragged the crisis out was ...