Long ago, there was a country in Asia. This country was growing at a supercharged rate. Very soon, this country became second largest economy of the world. With bustling & formidable manufacturing and huge trade surplus went past Germany to become the largest exporter. This country started worrying the Americans. The Asian country looked all but certain to overtake the Americans to become to most powerful country in the world. Its stock market was reaching new highs. But then all of a sudden, it came crashing into the ground.

Does this sound familiar to you? Of course, I'm talking about Japan.

Nikkei 225 had peaked at 38916 points in 1989, but then its plunge started. By November 1990, it had already breached 25000 on its downward slide, then it went below 20000 points in March ‘92, to 15000 in June ’92, and by September 2001, it slipped below 10000 points. With its economy slowing down to its lowest level coupled with deflation, Japanese economy suffered what is called as a “lost decade”, with almost zero percent GDP growth for years to come.

After recent stock crash in China, many analysts and commentators are drawing parallels with the Japanese crash in early 1990. Both these events had at least three things in common; a slowing economy, stock market crash and a housing market bust. Similarities in both the events are indeed very striking.

Both the countries had been following very similar policies and growth model i.e. by pushing growth through massive investments & exports. It is in this context that even the problems faced earlier by Japan and now by the Chinese are strikingly similar- excessive overcapacity, a crashed housing market, imbalanced growth and severely strained financial institutions.

Even the response of both the countries in difficult situations has been more or less the same. In 80s, when Japanese exporters were struggling in overseas markets, thanks to a strong yen, the Japanese government simply flooded the market with cheap credit, leading to an asset price bubble. Similarly, in the wake of 2008 financial meltdown, the Chinese pumped in huge amount of liquidity in the system to keep its growth intact. Although, this measure did help China in going back to the higher rate of growth (China's growth decelerated to almost 6% in 2008), but this led to huge spike in its debt levels & a housing bubble.

Having said that, there isn't much to worry. Boom, bust and recovery are the basic tenets of a financial system. In most of the cases, governments try to maneuver, if not control the situation by seeking a more soft landing for their economies but by doing so, they spook investors who cause outflows leading to a chaos & ultimately recession. Governments then intervene and increase spending & investments, in a hope to once again get the economy back on its feet. The Japanese did the same and so are the Chinese. Therefore, a financial crisis is not the end of the world. We have already seen in 2008, how countries weathered the crisis.

Nevertheless, the current volatility in Chinese stock and its economy is definitely not a good sign. In Japan's case, although such was the effect on Japanese economy that it has not yet recovered, its ripple effect on other countries was quite modest in nature. However, China's case is different. We are already seeing the impact on raw-material exporting countries like Brazil, Chile & Australia. So, if China meets the same fate as Japan in 1990, the repercussions will be catastrophic.