It's a tale of two economies.

On the same day that China surprised with better-than-expected GDP, Japan's central bank was forced to lower its growth outlook.

But even as China's economy shows signs of recovering from a sharp slowdown, it remains vulnerable to the type of crash that dragged Japan into decades of falling consumer prices and stagnant growth.

That's according to research notes from Oxford Economics Ltd. and HSBC Holdings Plc, which warn of the similarities between China today and Japan in 1990.

While the two reports come to different conclusions, they both agree there is enough in common between the two countries to at least merit caution. Japan enjoyed rapid growth through the 1980s until the bursting of a real-estate and stock-market bubble in 1990. China too, has enjoyed decades of fast debt-fueled growth that created a steep run up in real estate prices and, over the past year, one of the world's biggest ever stock market rallies.

In its analysis, Oxford Economics found forecasters were extremely slow to recognize just how much Japan's growth potential had dropped after the crash and how long lasting the effects were.

David Fuller's view

Bubbles are inevitable, even commonplace in markets.  They will always occur because of human nature.  Too many countries have a bad track record of reining in bubbles, whether for reasons of vanity, greed or fear of angering people, not least investors. 

Remember Alan Greenspan’s “irrational exuberance” comment of 1996?  It was very sensible but he was widely castigated as I have discussed previously.  The criticism stopped Greenspan from gradually raising interest rates and margin requirements.  Consequently, the US stock market bubble continued to expand even more rapidly up until 1Q 2000 before finally bursting with damaging consequences.

Japan made no attempt to rein in its bubble until tough Yasushi Mieno was appointed Governor of the BoJ for that purpose on 17^th December 1989.  Unfortunately, he squeezed Japan’s money supply for the next three years with relish.  Needless to say the Nikkei 225 slumped and Japan’s economy went into a serious deflationary decline. 

China’s monetary officials will know this.  We can also be certain that they would do everything possible to avoid Japan’s long deflation, and for good reason.  In China’s command economy it would lead to revolution.  In Japan’s democracy the ruling Liberal Democratic Party only had to turn over its prime ministers at a rapid rate.  There were 10 of them between 1989 and 2006.