Differences

There are several important distinctions between the economies in 1980s Japan and present-day China.

First, they are at different levels of development.

By the mid-1980s, the Japanese had entered the post-industrial phase, in which the domestic market, being saturated, has little room for further development and the country has almost no gap between urban and rural areas. But China is still in the initial and middle stages of industrialization, and great disparities remain between urban and rural areas. China therefore boasts a large domestic market and great development potential.

Second, the degree of financial liberalization is different.

The Japanese yen became freely convertible currency as the government implemented financial liberalization, while China still carries out control of capital account.

Foreign investment in the Chinese stock and real estate markets is restricted. For its renminbi, or yuan, China uses a floating exchange rate under administration, so the yuan, with its low degree of internationalization, has limited influence in the world economy.

The Chinese currency has also appreciated much more slowly than the Japanese yen did in the 1980s. Since China began its currency reform in 2005, the renminbi has appreciated less than 20 percent against the U.S. dollar. By contrast, the Japanese yen appreciated more than 70 percent within four years of the Plaza Accord, in which all major industrial countries agreed to depreciate the U.S. dollar.

Third, the two countries have different approaches to dealing with their respective economic bubbles.

In the late 1980s, Japan completed its national tasks and entered a record-breaking economic heyday. Everyone, from politicians to ordinary people, ignored the bubbles that were developing. When the property market became overheated, Japan decided on a "hard landing" approach that led to a rapid economic bust.

In contrast, the Chinese Government has been on alert for possible bubbles, repeatedly affirming its commitment to preventing the economy from overheating. The government frequently rolls out new policies to keep property prices from rising too fast, but policies concerning the fiscal, monetary and currency sectors are all steady.

Finally, economic trends in the two countries are completely different.

China is unlikely to follow the suit of Japan, because the latter in the 1980s had limited potential and space to grow its economy, which doomed its economy to enter a period of recession after the economic bubble burst.

In China, however, economic bubbles have only developed to a certain degree. Rising property prices occur when the economy is growing, so the bubble is structural, affecting only part of the economy as opposed to the whole. The Japanese bubble, by contrast, was because of surplus.

China has fairly large potential for economic growth and plenty of room for adjustment. Even if economic bubbles deal a blow to China's economy, the recession will be mild as long as there are no big mistakes in policymaking. But China should not ignore the issue of asset bubbles.