The situation in Japan developed because the real estate got disconnected from its economic potential by a large margin. At the peak of the bubble in the mid-80’s the land value of just the imperial palace in Tokyo was worth more than the entire land value of California. A million times ratio!!. There is no amount of urbanization that could have solved this problem for you because the underlying economics did not make sense. In the end, I’m not sure the Japanese had a choice, maybe they could have let some banks fail earlier but the size of the bubble was so massive that immediate deflation would have triggered a Lehmann like moment for them.
In fact, if Option 2 is correct I’m pretty sure the Chinese leadership has no other option but to deflate the economic gap with a zombie like situation for decades. If you think they will let a Lehmann-like moment to happen and quickly reset prices back to the ‘right’ level you are mistaken. It would put the financial system at risk; the entire legitimacy of the CCP in danger and that would mean blood on the streets. They will keep shutting down the smaller non-state banks and keep rolling the loans of the bigger state banks and gradually write off the debt over several years. There is definitely no shock therapy of short-term pain that makes sense.
