Chinese real estate/stocks: A Chinese bubble has been deflated. Too bad it’s the wrong one. The main Shanghai stock market index has fallen 23% from its peak at the beginning of August, reversing half of the run-up that started early in 2009. That’s a welcome correction, but it doesn’t mean a return to normality, or address the bigger bubble round the corner.

Shares were driven up by a belief in China’s recovery – and by a rush of liquidity. The fall occurred because both were gently dampened. Politicians have warned that economic recovery isn’t a done deal. Monetary authorities drained some liquidity from the market, curbed certain kinds of lending and asked banks to show restraint.

Shares now trade at around 29 times trailing earnings, according to Bloomberg data. That’s higher than Asia overall, but roughly in line with China’s five-year average. The last peak in 2007 saw Chinese-listed shares trade at 50 times earnings. But runaway stock prices were never the biggest worry. China’s tradable market capitalisation is less than half its nominal GDP for 2008, according to official July data, compared with over 175% in the UK. Even after a recent surge, the number of brokerage accounts in China equals just 1% of the population. China’s masses don’t buy shares – and its companies don’t yet depend on the equity markets for capital.

Real estate is a different story. Housing makes up roughly a quarter of investment spending, which is in turn 40% of gross domestic product. The differences between China’s big cities make a bubble harder to spot. But record bids for land are cause for concern, as is falling affordability in big cities. Meanwhile, stagnant residential rents suggest speculation, not demand for somewhere to live, is pushing up house prices.

A burst real estate bubble could be fiendishly tricky to clear up. While stock markets clear in a day, property gluts can take months – if they clear at all. Liquidity already pumped into the system has only made things worse: cash-rich developers have less pressure to sell houses, so they can keep jimmying prices up further even as demand softens. Whatever the equity markets say, Beijing still has bubble trouble.

Japan: Japanese voters decisively rejected fiscal stimulus on Sunday’s elections. They threw out Taro Aso and his old-line Liberal Democrat Party policies of heavy infrastructure public spending. The victorious Democratic Party of Japan led by Yukio Hatoyama, which has an absolute majority of seats in the lower house, has promised a shift of 3% of GDP from infrastructure to tax transfers. That may produce faster growth, but deficits and debt loom as threats.

Japan: Japanese voters decisively rejected fiscal stimulus on Sunday’s elections. They threw out Taro Aso and his old-line Liberal Democrat Party policies of heavy infrastructure public spending. The victorious Democratic Party of Japan led by Yukio Hatoyama, which has an absolute majority of seats in the lower house, has promised a shift of 3% of GDP from infrastructure to tax transfers. That may produce faster growth, but deficits and debt loom as threats.

Japan’s voters were presented with a clear choice. Aso, the incumbent prime minister, had rejected the free market, budget-balancing policies favoured by the reformist Junichiro Koizumi and his two successors and reverted to the LDP’s traditional policy of heavy public spending on infrastructure. The downturn that began in September reinforced his approach, so after several episodes of stimulus Japan’s budget deficit was estimated at 8.9% of GDP in 2009. That’s lower than in Britain or the US, but Japan has less room for manoeuvre, since its government debt is forecast to total 217% of GDP by year-end.

Japan’s voters have rejected Aso’s approach. Aside from the LDP’s stunning defeat, several of Aso’s associates have lost their seats, while Koizumi’s son Shinjiro Koizumi won his father’s seat and Koizumi’s like-minded successor Shinzo Abe retained his. Aso has resigned as party leader; his likely successor, health minister Yoichi Masuzoe, is a reformist.

The DPJ has promised to ban senior bureaucrats from transferring to major corporations and promises to shift 3 per cent of GDP in government spending from infrastructure to social programs, such as income transfers of $3,000 per child to families. He will also emphasise economic development through small business and the domestic market, rather than favouring the big exporters. This approach should rebalance Japan’s economy and may produce better growth. The principal danger is the budget deficit and resulting public debt. These could quickly spiral out of control if the DPJ’s favoured constituencies of environmentalists and public sector unions are excessively rewarded.

Still even a bounce in the Japanese economy could make Hatoyama’s budgetary arithmetic much easier. After almost two decades of near-recession, that is not much to ask.