TOKYO (Reuters) - The combination of a property price bubble, demographic changes and rapid loan growth heightens the chance a country will face a financial crisis, a Bank of Japan deputy governor said on Tuesday, warning that China is now entering a “danger zone” in this regard.
Kiyohiko Nishimura, one of the BOJ’s two deputy governors and a former university professor with expertise on data analysis, noted that there were similarities between Japan’s asset-price bubble of the 1990s and the U.S. housing market bubble of the 2000s.
In both cases, when the ratio of working-age people to the population peaked at a time of high property prices and sharply rising loans, these coinciding conditions led to “malign” bubbles that spawned a financial crisis, he said.
“China has not yet peaked with respect to working-age population ratio, but it is close,” while loans are on the rise and property prices showed a clear upsurge through 2010, Nishimura told a conference in Sydney hosted by the Reserve Bank of Australia and the Bank for International Settlements.
“It is clear that not every bubble-bust episode leads to a financial crisis. However, if a demographic change, a property price bubble, and a steep increase in loans coincide, then a financial crisis seems more likely. And China is now entering the ‘danger zone’,” he said, according to the text of his speech posted on the BOJ’s website.
Nishimura made the remarks at the research conference, where policymakers studied asset bubbles and discussed how they affect financial stability and what tools they had at hand to prevent them or minimize the damage to the economy once they burst.
His speech, titled “How to detect and respond to property bubbles: challenges for policy-makers,” analyzed in theoretical context the historical trends of asset bubbles.
Nishimura also said policymakers themselves sometimes sow the seeds of property bubbles by nourishing overly optimistic expectations about the economy among the public.
“It is extremely difficult to persuade people who (want to) believe ‘this time is different’ and are convinced they are now on the foothills of eternal prosperity, just as long as their path is not blocked by some stupid policymaker,” he said.
Editing by Richard Borsuk