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The Confidence Trap: Japan’s Past Bubble and China’s Recent Bubble


  • Myung-koo Kang


This paper explores the origin of China’s recent credit and asset boom by comparing it with the Japanese bubble economy in the late 1980s by focusing on the asymmetric pattern of financial liberalisation under high savings. It argues that (1) both cases show a ‘confidence trap’ in that policy-makers of the government shared a complacent mindset that they can achieve the optimal mix of market liberalisation and repression, while believing that their political economic system is fundamentally different from others; (2) Such complacent confidence precipitated the supply-side driven financial reforms, in which both governments tried to diversify the credit channels of bank deposits by promoting non-bank financial intermediaries; (3) Exogenous shocks played a pivotal role in enforcing the government to take aggressive monetary easing and fiscal expansionary measures. But the Chinese case is different from the Japanese case in that (1) local politics has promoted a ‘too secure to fail’ situation in which rent-seeking activities are difficult to be detected, thus aggravating the hidden systemic risks; (2) China needs to liberalise its capital account with the more strengthened macroprudential regulatory governance, as the global foreign exchange markets have drastically changed from the period of the 1980s.

Suggested Citation

  • Myung-koo Kang, 2018. "The Confidence Trap: Japan’s Past Bubble and China’s Recent Bubble," New Political Economy, Taylor & Francis Journals, vol. 23(1), pages 1-26, January.
  • Handle: RePEc:taf:cnpexx:v:23:y:2018:i:1:p:1-26
    DOI: 10.1080/13563467.2017.1321626

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    References listed on IDEAS

    1. Eswar S. Prasad, 2015. "The Dollar Trap: How the U.S. Dollar Tightened Its Grip on Global Finance," Economics Books, Princeton University Press, edition 1, number 10599.
    2. Takeo Hoshi & Anil Kashyap, 2004. "Corporate Financing and Governance in Japan: The Road to the Future," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262582481, January.
    3. Barry Naughton, 2007. "The Chinese Economy: Transitions and Growth," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262640643, January.
    4. Barry Eichengreen, 2004. "Capital Flows and Crises," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262550598, January.
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