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Lost Decades

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This article is about the Japanese economic crisis. For other uses, seeLost Decade.
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TheLost Decadesare a lengthy period ofeconomic stagnationinJapanprecipitated by theasset price bubble's collapse beginning in 1990. The singular termLost Decade(Thất われた10 niên,Ushinawareta Jūnen)originally referred to the1990s,[1]but the2000s(Lost 20 Years,Thất われた20 niên)[2]and the2010s(Lost 30 Years,Thất われた30 niên)[3][4][5]have been included by commentators as the phenomenon continued.[4]

From 1991 to 2003, theJapanese economy,as measured by GDP, grew only 1.14% annually, while the average real growth rate between 2000 and 2010 was about 1%, both well below otherindustrialized nations.[6][4]Debt levels continued to rise in response to thefinancial crisisin theGreat Recessionin 2008, theTōhoku earthquake and tsunamiand theFukushima nuclear disasterin 2011, and theCOVID-19 pandemicand subsequentrecessionbetween January 2020 and October 2021. Broadly impacting the entire Japanese economy, over the period of 1995 to 2023, the country's GDP fell from $5.33 trillion to $4.21 trillion innominalterms,[7]real wagesfell around 11%,[8]while the country experienced a stagnant or decreasingprice level.[9]

Japan's nominal GDP per capita has stagnated around $40,000 since the 1990s, while other economies have experienced significant growth.

Underdeflation,the value of cash increases as time passes. In such a situation, Japanese companies began to cut wages,research and development,and other investments, opting to hold onto cash instead. This tendency, coinciding with the acceleration of theageing population,gradually diminished the competitiveness of the economy and the potential growth rate of the country.[10]TheBank of Japan(BoJ) and the Japanese government has focused on halting the deflation and eventually achieving the 2% inflation target since the early 2000s. However, as deflation persisted, the traditional monetary policy of setting low interest rates to stimulate investment and consumption, which typically causes inflation, became ineffective. This ineffectiveness arose because a nominal rate of 0% effectively meant a positive real rate due to the increasing value of cash. This phenomenon is known as the "Zero Interest Rate Constraint".[11]

In 2013, BoJ implemented the Quantitative and Qualitative Monetary Easing Policy, and in 2016, it introduced a negative bank rate of -0.1%.[12]This policy achieved mild inflation of around 0-1.0% in the late 2010s.[13]Theglobal inflation surge from 2021 to 2023finally helped Japan reach an inflation rate of above 2%. However, while other major economies focus on suppressing inflation by raising interest rates, Japan aims to firmly establish inflation by maintaining low rates. As a side effect, theJapanese yenhas become extremely weak, hitting a 34-year low of 160 yen/USD in May 2024.[14]Thereal effective exchange ratewas at 68.65 in May 2024, the lowest level since statistics began in 1970, with the 2020 average set at 100.[15][16][17][18]This devaluation of the currency caused Japan to lose its status as theworld’s third largest economytoGermanyin nominal terms, which was approximately half the size of the country's economy a decade earlier.[19][20][21]

While there is some debate on the extent and measurement of Japan's setbacks,[22][23]the economic effect of the Lost Decades is well established, and Japanese policymakers continue to grapple with its consequences.

Causes[edit]

See also:Japanese asset price bubble
Japan bonds,inverted yield curvein 1990
30 year
20 year
10 year
5 year
2 year
1 year
Japan money supply and inflation rate (year over year)
M2 money supply
Inflation
Rate of change in Japanese property prices, percentage (year over year)

Japan's economic miraclein the second half of the 20th century ended abruptly at the start of the 1990s. By the late 1980s, the Japanese economy experienced anasset price bubblecaused by loan growth quotas dictated upon the banks by Japan's central bank, theBank of Japan,through a policy mechanism known as the "window guidance".[24][25]As economistPaul Krugmanexplained, "Japan's banks lent more, with less regard for quality of the borrower, than anyone else's. In doing so they helped inflate the bubble economy to grotesque proportions."[26]EconomistRichard Wernerwrites that external pressures such as thePlaza Accordand the policy ofMinistry of Financeto reduce the officialdiscount rateare insufficient to explain the actions taken by the Bank of Japan.[24][25]

Nikkei 225 Index

Trying to deflate speculation and keepinflationin check, the Bank of Japan sharply raised inter-bank lending rates in late 1989.[27]This sharp policy caused the bursting of the bubble, and the Japanesestock market crashed.Equityand asset prices fell, leaving overly-leveraged Japanese banks and insurance companies with books full of bad debt. As a result, bank credit growth stagnated.[28]The financial institutions were bailed out throughcapitalinfusions from theGovernment of Japan,loans and cheap credit from the central bank, and the ability to postpone the recognition of losses, ultimately turning them intozombie banks.Yalman OnaranofBloomberg Newswriting inSalonstated that the zombie banks were one of the reasons for the following long stagnation.[29]Additionally, Michael Schuman ofTimemagazine wrote that these banks kept injecting new funds into unprofitable "zombie firms"to keep them afloat, arguing that they weretoo big to fail.However, most of these companies were too debt-ridden to do much more than survive on bail-out funds. Schuman believed that Japan's economy did not begin to recover until this practice had ended.[30]

Eventually, many of these failing firms became unsustainable, and a wave of consolidation took place, resulting in four national banks in Japan. Many Japanese firms were burdened with heavy debts, and it became very difficult to obtain credit. Many borrowers turned tosarakin(loan sharks) for loans. As of 2012, the official interest rate was 0.1%;[31]the interest rate has remained below 1% since 1994.[32]

Economic effects[edit]

Despite mild economic recovery in the 2000s,conspicuous consumptionof the 1980s has not returned to the same pre-crash levels. Japanese firms such asToyota,Sony,Panasonic,Sharp,andToshiba,which had dominated their respective industries from the 1960s to the 1990s, had to fend off strong competition from rival firms based in other East Asian countries, particularlySouth Korea,andChina,since the 2000s. In 1989, of the world's top 50 companies bymarket capitalization,32 were Japanese; by 2018, only one such company (Toyota) remains in the top 50.[33]Many Japanese companies replaced a large part of their workforce with temporary workers, who had little job security and fewer benefits. As of 2009, these non-traditional employees made up more than a third of the labor force.[34]For the wider Japanese workforce, wages have stagnated. From their peak in 1997, real wages fell around 13% by 2013,[8]an unprecedented number among developed nations.[citation needed]Surveys by theMinistry of Health, Labour and Welfareshowed that household income in 2010 had fallen to 1987 levels.[35]According to Teikoku Databank, Japan's largest credit rating agency, the aggregate sales of all companies in Japan decreased by 3.9% in 2010 compared to 2000, or a decrease of 13,848.2 billion yen.[36]

The wider economy of Japan is still recovering from the impact of the 1991 crash and subsequent lost decades. It took 12 years for Japan's GDP to recover to the same levels as 1995. And as a greater sign of economic malaise, Japan also fell behind in output per capita. In 1991, real output per capita in Japan was 14% higher than that of Australia, but in 2011 real output had dropped to 14% below Australia's levels.[37]In the span of 30 years, Japan also experienced slower labor productivity growth than other countries. Whereas in 1990 it ranked sixth amongG7nations ahead of theUnited Kingdom,in 2021 labor productivity of Japan was the lowest in the G7 and ranked 29th of 38OECDmembers.[38]

In response to chronic deflation and low growth, Japan has attempted economic stimulus and thereby run a fiscal deficit since 1991.[39]These economic stimuli have had at best nebulous effects on the Japanese economy and have contributed to the huge debt burden on the Japanese government. Expressed as a percentage of GDP, at ~240% Japan had the highest level of debt of any nation on earth as of 2013.[39]While Japan's is a special case where the majority of public debt is held in the domestic market and by the Bank of Japan, the sheer size of the debt demands large service payments and is a worrying sign of the country's financial health.

More than 25 years after the initial market crash, Japan was still feeling the effects of Lost Decades. However, several Japanese policymakers have attempted reforms to address the malaise in the Japanese economy. AfterShinzō Abewas elected as Japanese prime minister in December 2012, Abe introduced a reform program known asAbenomicswhich sought to address many of the issues raised by Japan's Lost Decades. His "three arrows" of reform intend to address Japan's chronically low inflation, decreasing worker productivity relative to other developed nations, and demographic issues raised by an aging population.[40]Initially, investor response to the announced reform was strong, and theNikkei 225rallied to 20,000 in May 2015 from a low of around 9,000 in 2008. The Bank of Japan has set a 2% target for consumer-price inflation, although initial successes has been hampered by a sales tax increase enacted to balance the government budget.[41]However, the impact on wages and consumer sentiment was more muted. AKyodo Newspoll in January 2014 found that 73% of Japanese respondents had not personally noticed the effects of Abenomics, only 28 percent expected to see a pay raise, and nearly 70% were considering cutting back spending following the increase in the consumption tax.[42]

In early 2020, as Japan began to suffer from theCOVID-19 pandemic,Jun Saito of the Japan Center for Economic Research stated that the pandemic's impact delivered the "final blow" to Japan's long fledgling economy, which had resumed slow growth in 2018.[43]

Interpretation[edit]

EconomistPaul Krugmanhas argued that Japan's lost decades are an example of aliquidity trap(a situation in which monetary policy is unable to lower nominal interest rates because it is already close to zero). He explained how truly massive the asset bubble was in Japan by 1990, with a tripling of land and stock market prices during the prosperous 1980s. Japan's high personal savings rates, driven in part by the demographics of an aging population, enabled Japanese firms to rely heavily on traditional bank loans from supporting banking networks, as opposed to issuing stock or bonds via the capital markets to acquire funds. The cozy relationship of corporations to banks and the implicit guarantee of a taxpayer bailout of bank deposits created a significantmoral hazardproblem, leading to an atmosphere ofcrony capitalismand reduced lending standards. In so doing they helped inflate the bubble economy to grotesque proportions. "The Bank of Japan began increasing interest rates in 1990 due in part to concerns over the bubble and in 1991 land and stock prices began a steep decline, within a few years reaching 60% below their peak.[26]

EconomistRichard Koowrote that Japan's "Great Recession" that began in 1990 was a "balance sheet recession".It was triggered by a collapse in land and stock prices, which caused Japanese firms to becomeinsolvent.Despite zerointerest ratesand expansion of the money supply to encourage borrowing, Japanese corporations in aggregate opted to pay down their debts from their own business earnings rather than borrow to invest as firms typically do. Corporate investment, a key demand component ofGDP,fell enormously (22% of GDP) between 1990 and its peak decline in 2003. Japanese firms overall became net savers after 1998, as opposed to borrowers. Koo argues that it was massive fiscal stimulus (borrowing and spending by the government) that offset this decline and enabled Japan to maintain its level of GDP. In his view, this avoided a U.S. typeGreat Depression,in which U.S. GDP fell by 46%. He argued that monetary policy was ineffective because there was limited demand for funds while firms paid down their liabilities. In a balance sheet recession, GDP declines by the amount of debt repayment and un-borrowed individual savings, leaving government stimulus spending as the primary remedy.[44][45]

EconomistScott Sumnerhas argued that Japan's monetary policy was too tight during the Lost Decades and thus prolonged the pain felt by the Japanese economy.[46][47][48][49]

EconomistsFumio HayashiandEdward Prescottargue that the anemic performance of the Japanese economy since the early 1990s is mainly due to the low growth rate of aggregate productivity. Their hypothesis stands in direct contrast to popular explanations that are based in terms of an extended credit crunch that emerged in the aftermath of a bursting asset “bubble.” They are led to explore the implications of their hypothesis on the basis of evidence that suggests that despite the ongoing difficulties in the Japanese banking sector, desired capital expenditure was for the most part fully financed. They suggest that Japan's sluggish investment activity is likely to be better understood in terms of low levels of desired capital expenditure and not in terms of credit constraints that prohibit firms from financing projects with positive net present value (NPV). Monetary or fiscal policies might increase consumption in the short run, but unless productivity growth increases, there is a legitimate fear that such a policy may simply transform Japan from a low-growth/low-inflation economy to a low-growth/high-inflation economy.[50][51]

In her analysis of Japan's gradual path to economic success and then quick reversal, Jennifer Amyx wrote that Japanese experts were not unaware of the possible causes of Japan's economic decline. Rather, to return Japan's economy back to the path to economic prosperity, policymakers would have had to adopt policies that would first cause short-term harm to the Japanese people and government.[example needed][52]Under this analysis, says Ian Lustick, Japan was stuck on a "local maximum," which it arrived at through gradual increases in its fitness level, set by the economic landscape of the 1970s and 80s. Without an accompanying change in institutional flexibility, Japan was unable to adapt to changing conditions and even though experts may have known which changes needed to be made, they would have been virtually powerless to enact those changes without instituting unpopular policies which would have been harmful in the short-term. Lustick's analysis is rooted in the application ofevolutionary theoryandnatural selectionto understanding institutional rigidity in the social sciences.[53]

Legacy[edit]

After theGreat Recessionof 2007–2009, manyWesterngovernments and commentators have referenced the Lost Decades as a distinct economic possibility for stagnatingdeveloped nations.On February 9, 2009, in warning of the dire consequences facing theUS economyafter itshousing bubble,U.S. PresidentBarack Obamacited the "lost decades" as a prospect the American economy faced.[54]And in 2010,Federal Reserve Bankof St. Louis PresidentJames Bullardwarned that the United States was in danger of becoming "enmeshed in a Japanese-style deflationary outcome within the next several years."[55]However, this scenario did not happen.

See also[edit]

References[edit]

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Further reading[edit]

  • Fletcher III, W. Miles, and Peter W. von Staden, eds.Japan's 'Lost Decade': Causes, Legacies and Issues of Transformative Change(Routledge, 2014)
  • Funabashi, Yoichi, andBarak Kushner,eds.Examining Japan's Lost Decades(Routledge, 2015)excerpt
  • Hayashi, Fumio, and Edward C. Prescott. "The 1990s in Japan: A lost decade."Review of Economic Dynamics(2002) 5#1 pp: 206–235.online
  • Hoshi, Takeo, and Anil K. Kashyap. "Will the US and Europe avoid a lost decade? Lessons from Japan’s postcrisis experience."IMF Economic Review63.1 (2015): 110–163.online
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