Lost Decade ( Japan ) - wikipedia Lost Decade ( Japan ) History of Japan Tokyo skyline Periods Paleolithic before 14,000 BC Jōmon 14,000 -- 300 BC Yayoi 300 BC -- 300 AD Kofun 300 -- 538 Asuka 538 -- 710 Nara 710 -- 794 Heian 794 -- 1185 Kamakura 1185 -- 1333 Kenmu Restoration 1333 -- 1336 Muromachi ( Ashikaga ) Nanboku - chō Sengoku 1336 -- 1573 Azuchi -- Momoyama Nanban trade 1573 -- 1603 Edo ( Tokugawa ) Sakoku Convention of Kanagawa Bakumatsu 1603 -- 1868 Meiji Restoration 1868 -- 1912 Taishō World War I 1912 -- 1926 Shōwa Financial crisis Militarism Pacific War ( World War II ) Occupation Post-occupation Bubble Economy 1926 -- 1989 Heisei Lost Decade 1989 -- present Topics Currency Earthquakes Economy Education Empire Historiography Military Naval Post-war Glossary Timeline The Lost Decade or the Lost 10 Years ( 失 われ た 十 年, Ushinawareta Jūnen ) is a period of economic stagnation in Japan following the Japanese asset price bubble 's collapse in late 1991 and early 1992. The term originally referred to the years from 1991 to 2000, but recently the decade from 2001 to 2010 is often included, so that the whole period is referred to as the Lost Score or the Lost 20 Years ( 失 われ た 二 十 年, Ushinawareta Nijūnen ). Broadly impacting the entire Japanese economy, over the period of 1995 to 2007, GDP fell from $5.33 to $4.36 trillion in nominal terms, real wages fell around 5 %, while the country experienced a stagnant price level. While there is some debate on the extent and measurement of Japan 's setbacks, the economic effect of the Lost Decade is well established and Japanese policymakers continue to grapple with its consequences. It took longer to recover from the impact of these events because the conditions imposed by the new environment were not favorable to the Japanese management style at that time. Contents 1 Causes 2 Effects 3 Interpretation 4 Legacy 5 See also 6 References 7 Further reading Causes Japan 's strong economic growth in the second half of the 20th century ended abruptly at the start of the 1990s. In the late 1980s, abnormalities within the Japanese economic system had fueled a speculative asset price bubble of a massive scale. The bubble was caused by the excessive loan growth quotas dictated on the banks by Japan 's central bank, the Bank of Japan, through a policy mechanism known as the `` window guidance ''. As economist Paul Krugman explained, `` 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. '' Trying to deflate speculation and keep inflation in check, the Bank of Japan sharply raised inter-bank lending rates in late 1989. This sharp policy caused the bursting of the bubble and the Japanese stock market crashed. Equity and asset prices fell, leaving overly leveraged Japanese banks and insurance companies with books full of bad debt. The financial institutions were bailed out through capital infusions from the government, loans and cheap credit from the central bank, and the ability to postpone the recognition of losses, ultimately turning them into zombie banks. Yalman Onaran of Bloomberg News writing in Salon stated that the zombie banks were one of the reasons for the following long stagnation. Additionally Michael Schuman of Time magazine noted that these banks kept injecting new funds into unprofitable `` zombie firms '' to keep them afloat, arguing that they were too 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. 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 to sarakin ( loan sharks ) for loans. As of 2012, the official interest rate was 0.1 % ; the interest rate has remained below 1 % since 1994. Effects Despite mild economic recovery in the 2000s, conspicuous consumption of the 1980s has not returned to the same pre-crash levels. Difficult times in the 1990s made people frown on ostentatious displays of wealth, while Japanese firms such as Toyota and Sony which had dominated their respective industries in the 1980s had to fend off strong competition from rival firms based in other East Asian countries, particularly South Korea. 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. For the wider Japanese workforce, wages have stagnated. From their peak in 1997, real wages have since fallen around 13 % -- an unprecedented number among developed nations. 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. In the span of 20 years, Japan 's economy was overtaken not only in gross output, but labor efficiency, whereas previously it was a global leader in both. In response to chronic deflation and low growth, Japan has attempted economic stimulus and thereby run a fiscal deficit since 1991. 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 has the highest level of debt of any nation on earth. 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. Interpretation Economist Paul Krugman has argued that Japan 's lost decade is an example of a liquidity trap ( a situation in which monetary policy is unable to lower nominal interest rates because these are 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 significant moral hazard problem, leading to an atmosphere of crony capitalism and reduced lending standards. He wrote : `` Japan 's banks lent more, with less regard for quality of the borrower, than anyone else 's. 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. Economist Richard Koo wrote 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 become insolvent, meaning their assets were worth less than their liabilities. Despite zero interest rates and 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 of GDP, 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. type Great 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. Economist Scott Sumner has argued that Japan 's monetary policy was too tight during the Lost Decade and thus prolonged the pain felt by the Japanese economy. Economists Fumio Hayashi and Edward Prescott argue 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. In her analysis of Japan 's gradual path to economic success and then quick reversal, Jennifer Amyx noted 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. 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 of evolutionary theory and natural selection to understanding institutional rigidity in the social sciences. Legacy After the Great Recession from 2007 -- 2009, many Western governments and commentators have referenced the Lost Decade as a distinct economic possibility for stagnating developed nations. On February 9, 2009, in warning of the dire consequences facing the United States economy after its housing bubble, U.S. President Barack Obama cited the `` lost decade '' as a prospect the American economy faced. And in 2010, Federal Reserve Bank of St. Louis President James Bullard warned that the United States was in danger of becoming `` enmeshed in a Japanese - style deflationary outcome within the next several years. '' More than 25 years after the initial market crash, Japan is still feeling the effects of Lost Decade. However, several Japanese policymakers have attempted reforms to address the malaise in the Japanese economy. After Shinzo Abe was elected as Japanese prime minister in December 2012, Abe introduced a reform program known as Abenomics which sought to address many of the issues raised by Japan 's Lost Decade. 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 ageing population. Investor response to the announced reform was strong, and the Nikkei 225 rallied 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 success has been hampered by a sales tax increase enacted to balance the government budget. See also 1990s portal 2000s portal Economic history of Japan Economic stagnation Japanese post-war economic miracle Political stagnation Zero interest rate policy References Jump up ^ http://fhayashi.fc2web.com/Prescott1/Postscript_2003/hayashi-prescott.pdf Jump up ^ Leika Kihara ( August 17, 2012 ). `` Japan eyes end to decades long deflation ''. Reuters. Retrieved September 7, 2012. Jump up ^ `` Japanese GDP, nominal ''. ^ Jump up to : `` Waging a New War ''. March 9, 2013. Jump up ^ `` Inflation Japan - CPI inflation ''. Jump up ^ Fingleton, Eamonn ( January 6, 2012 ). `` The Myth of Japan 's Failure ''. The New York Times. Jump up ^ Fingleton, Eamonn ( January 12, 2012 ). `` Video interview on BBC News with Eamonn Fingleton ''. BBC News, 5 min. 26 sec. Jump up ^ Werner, Richard. New Paradigm in Macroeconomics. doi : 10.1057 / 9780230506077. Jump up ^ Werner, Richard A. `` Monetary Policy Implementation in Japan : What They Say versus What They Do ''. Asian Economic Journal. 16 ( 2 ) : 111 -- 151. doi : 10.1111 / 1467 - 8381.00145. ^ Jump up to : Krugman, Paul ( 2009 ). The Return of Depression Economics and the Crisis of 2008. W.W. Norton Company Limited. ISBN 978 - 0 - 393 - 07101 - 6. Jump up ^ `` Japan Raised Interest Rates ''. Reuters via The New York Times. December 25, 1989. Jump up ^ Onaran, Yalman ( 2011 - 11 - 25 ). `` Kill the zombie banks ! ''. Salon Media Groupn. Retrieved 2013 - 01 - 16. Jump up ^ Schuman, Michael ( 2008 - 12 - 19 ). `` Why Detroit Is Not Too Big to Fail ''. Time Inc. Retrieved 2008 - 12 - 23. Jump up ^ Ohno, Kenichi. `` Economic Development of Japan ''. National Graduate Institute for Policy Studies. Retrieved 3 April 2011. Jump up ^ `` Bank of Japan Interest Rates ''. Jump up ^ Tabuchi, Hiroko ( 2009 - 02 - 22 ). `` When Consumers Cut Back : An Object Lesson From Japan ''. The New York Times. Retrieved 2010 - 05 - 11. Jump up ^ `` The Japanese Tragedy ''. The Economist Blog. ^ Jump up to : `` Do n't Mention the Debt ''. May 4, 2013. Jump up ^ Koo, Richard ( 2009 ). The Holy Grail of Macroeconomics - Lessons from Japan 's Great Recession. John Wiley & Sons ( Asia ) Pte. Ltd. ISBN 978 - 0 - 470 - 82494 - 8. Jump up ^ Presentation by Richard Koo - The Age of Balance Sheet Recessions - April 2010 Jump up ^ Sumner, Scott. `` Why Japan 's QE did n't `` work '' ``. The Money Illusion. Retrieved November 24, 2014. Jump up ^ Sumner, Scott. `` More evidence that the BOJ is not trying to create inflation ''. The Money Illusion. Retrieved November 24, 2014. Jump up ^ Sumner, Scott. `` Rooseveltian Resolve ''. The Money Illusion. Retrieved November 24, 2014. Jump up ^ Sumner, Scott. `` The other money illusion ''. The Money Illusion. Retrieved November 24, 2014. Jump up ^ Amyx, Jennifer ( 2004 ). Japan 's Financial Crisis : Institutional Rigidity and Reluctant Change. Princeton University Press. pp. 17 -- 18. Jump up ^ Lustick, Ian ( 2011 ). `` Institutional Rigidity ''. Cliodynamics. 2 ( 2 ). Jump up ^ Meckler, Laura ; Weisman, Jonathan ( 2009 - 02 - 10 ). `` Obama Warns of ' Lost Decade ' ''. The Wall Street Journal. Jump up ^ The Seven Faces of ' The Peril ' '' Jump up ^ `` The third arrow ''. June 28, 2014. Jump up ^ `` Inflation in Japan rises to 30 - year high ''. June 27, 2014. Further reading 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, and Barak 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 Economy of Japan History Economic history of Japan Foreign commerce and shipping of Empire of Japan Agriculture in the Empire of Japan Japanese asset price bubble Japanese post-war economic miracle Lost Decade ( Japan ) Zaibatsu Nemawashi Simultaneous recruiting of new graduates Shūshin koyō Nenko System Salaryman Keiretsu Japanese management culture Standard of living in Japan Amakudari Currency Bank of Japan Banknotes of the Japanese yen Japan Mint Japanese yen National Printing Bureau Tokugawa coinage Scrip of Edo period Japan Banking and Finance Nikkei 225 Osaka Securities Exchange Tokyo Stock Exchange Financial services in Japan Japanese financial system Monetary and fiscal policy of Japan Capital flows in Japan Government agencies Ministry of Economy, Trade and Industry Japan External Trade Organization Development Bank of Japan Ministry of Land, Infrastructure, Transport and Tourism ( Japan ) Taxation & Labor market Taxation in Japan National Tax Agency Labor market Labor unions in Japan Energy Energy in Japan Solar power in Japan List of power stations in Japan List of Japan natural gas companies Rankings International rankings of Japan Industry Construction industry of Japan Automotive industry in Japan Japanese employment law Japanese domestic market Transportation in Japan Manufacturing industries of Japan Agriculture, forestry, and fishing in Japan Fishing industry in Japan Whaling in Japan Mining in Japan Consumer electronics in Japan Private enterprise in Japan Japanese public corporations Defense industry of Japan Associations Japan Chamber of Commerce and Industry Japan Business Federation Japan Association of Corporate Executives Japan Foreign Trade Council Japan Automobile Manufacturers Association Other topics Research and development in Japan Industrial policy of Japan Government - business relations in Japan Economic relations of Japan Exports National debt of Japan Retrieved from `` https://en.wikipedia.org/w/index.php?title=Lost_Decade_(Japan)&oldid=813437263 '' Categories : Heisei period 1990s in Japan Economic history of Japan 1990s economic history Economic collapses Hidden categories : Articles containing Japanese - language text All articles with unsourced statements Articles with unsourced statements from November 2017 Articles with unsourced statements from September 2016 Talk Contents About Wikipedia Deutsch Español فارسی Français 한국어 Bahasa Indonesia עברית 日本 語 Polski Português Русский Türkçe Tiếng Việt 中文 Edit links This page was last edited on 3 December 2017, at 18 : 44. 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Question: up until the early part of the 2000’s japan’s economy experienced an extended period of
Answer: economic stagnation