Opinion
China Must Learn from Japan’s Unhappy Christmas
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If a series of financial shocks hit the middle class, it may be difficult for the [Chinese] government to retain the confidence of the people in the country’s economic prospects, particularly if exports remain tied to sluggish Western growth rates.
By Roy C. Smith
Amid the holiday bubbly, some will recall that 25 years ago, on December 29, the Nikkei index stood at 38,916, its all-time high. What happened next has sobering lessons for China. The bubble burst in a most non-festive fashion – and it had been inflated by government efforts to stave off exactly the problem that besets China today.
The Japanese babaru keizai, or “bubble economy”, of the 1980s resulted from efforts to sustain the “miracle growth” that began in the 1950s and won Japan its reputation as an economic superpower. After two decades of export-fuelled growth, in the middle of the 1970s, Japan had started slowing towards a world average growth rate. Japanese officials sought to counter the trend with large amounts of easy money.
The ensuing “excess liquidity”, which reached 5.5% of GDP in 1986 and 1987, did not pass into goods and services as inflation but into rising prices of stocks and real estate. At the market’s peak, stocks in the Nikkei index traded at an average of 70 times earnings. Japanese institutions, corporations and households (and many foreign investors) all bought these assets, very often with borrowed money, because of their belief in the limitless sustainability of Japanese economic success. The Nikkei index rose six-fold in the 1980s, compared with a three-fold increase in the US stockmarket.
Read full article as published by Financial News
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Roy C. Smith is the Kenneth G. Langone Professor of Entrepreneurship and Finance and a Professor of Management Practice.
The Japanese babaru keizai, or “bubble economy”, of the 1980s resulted from efforts to sustain the “miracle growth” that began in the 1950s and won Japan its reputation as an economic superpower. After two decades of export-fuelled growth, in the middle of the 1970s, Japan had started slowing towards a world average growth rate. Japanese officials sought to counter the trend with large amounts of easy money.
The ensuing “excess liquidity”, which reached 5.5% of GDP in 1986 and 1987, did not pass into goods and services as inflation but into rising prices of stocks and real estate. At the market’s peak, stocks in the Nikkei index traded at an average of 70 times earnings. Japanese institutions, corporations and households (and many foreign investors) all bought these assets, very often with borrowed money, because of their belief in the limitless sustainability of Japanese economic success. The Nikkei index rose six-fold in the 1980s, compared with a three-fold increase in the US stockmarket.
Read full article as published by Financial News
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Roy C. Smith is the Kenneth G. Langone Professor of Entrepreneurship and Finance and a Professor of Management Practice.