MADISON, WISCONSIN ¨C China¡¯s economy today bears an unsettling resemblance to Japan¡¯s in the 1990s, when the collapse of a housing bubble led to prolonged stagnation.
But Japan¡¯s ¡°lost decades¡± were not the inevitable result of irreversible trends; they reflected policy blunders, rooted in a flawed understanding of the challenges the economy faced. Will Chinese policymakers make the same mistakes?
Japan¡¯s housing bubble was preceded by sharply rising ratios of home prices to annual income, with Tokyo¡¯s surging from eight in 1985 to 18 in 1990. This trend was driven by a number of factors, including Japan¡¯s land-tax policy, financial deregulation and poor coordination of fiscal and monetary policy. But demand from first-time homebuyers ¡ª aged 39-43, on average ¡ª also made a substantial contribution.
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