Japan's Bubble, the USA's Bubble and China's Bubble

This paper compares the three recent episodes of boom and bust cycles in asset prices: Japan in the late 1980s to the 1990s; the USA since the mid-1990s; and China during the past decade. Although we have not yet seen a collapse of Chinese property prices, their increases so far are comparable to those in the other two episodes and a careful comparative study is warranted. The present paper first examines the behavior of asset prices, of property prices in particular, in the three cases, and highlights some similarities. The paper emphasizes the role played by extremely easy monetary policy in generating bubble-like asset price behavior in the three cases. The reason for easy monetary policies is investigated. In the US case, the monetary authority was concerned about the risk of deflation in the early to mid-2000s. The experiences of Japan and China are quite similar in that the monetary authorities of both countries were seriously concerned about the possible deflationary effects of exchange rate appreciation on the economy. The implications of such a finding for the future of Chinese macroeconomic policy are discussed.