Chinese Monetary Policy under Pressure as Asset Bubble Balloons – Japan’s Experience and Lessons Offer Useful Reference

5 Pages Posted: 4 Nov 2010

See all articles by C. H. Kwan

C. H. Kwan

Nomura Institute of Capital Markets Research

Date Written: November 3, 2010

Abstract

The Japanese economy has been in a slump ever since the asset bubble burst in 1990 and has yet to recover fully from the aftereffects. A bubble appears to be forming in China, where property and other asset prices have risen sharply as a result of an accommodative monetary policy. If China is not to share the same fate as Japan, it needs to learn the following lessons from Japan’s experience. First, in view of the risk that asset price fluctuations can destabilize the financial system (e.g., by leading to an increase in nonperforming loans), monetary policy should take account of what is happening to the price of assets such as shares and property, in addition to prices as measured by the CPI. Second, a bubble is usually the result of excess liquidity, and the central bank should monitor the rate of credit expansion, as well as any changes in its major components, especially property-related loans. Third, it should try to identify risks to the economy before they emerge and pursue a forward-looking monetary policy. Finally, a central bank that puts exchange rate stability first would have to intervene actively in the foreign exchange market, which would severely constrain its freedom to pursue an independent monetary policy.

Keywords: monetary policy, asset bubble

JEL Classification: E52

Suggested Citation

Kwan, C.H., Chinese Monetary Policy under Pressure as Asset Bubble Balloons – Japan’s Experience and Lessons Offer Useful Reference (November 3, 2010). Nomura Journal of Capital Markets, Vol. 2, No. 2, 2010, Available at SSRN: https://ssrn.com/abstract=1702663

C.H. Kwan (Contact Author)

Nomura Institute of Capital Markets Research ( email )

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