# Understanding Japan's Lost Decade: Key Factors and Lessons

![Japan](https://www.investopedia.com/thmb/4TrHRWa91_CpuMPHWO1nRlZRH0I=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Contiki-Japan-1-56a972613df78cf772a70ba1.jpg)

*Japan Tours with Contiki.*

> **Definition**
>
> The Lost Decade was a prolonged period of economic stagnation in Japan that began in the early 1990s and was characterized by low growth and deflation, leading to ongoing economic challenges.

## What Is the Lost Decade?

The Lost Decade refers to nearly ten years of slow or negative economic growth in Japan during the 1990s. Misguided government policies in response to a real estate bubble, along with demographic changes, are considered to be the main culprits for the Lost Decade. Stagnant growth in subsequent years has led the period from 1991 through 2011 and even 2021 to sometimes be referred to as Japan's Lost Decades. In the United States, the first decade of the 21st century, which was bookended by two stock market crashes, is often compared to Japan's Lost Decade.

### Key Takeaways

*   The Lost Decade began in the 1990s, marked by prolonged economic stagnation in Japan.
*   Japan's economic bubble burst in the early 1990s, leading to a stock market crash and debt crisis.
*   Loose monetary policy in the 1980s led to speculation and inflated asset values, contributing to the crisis.
*   Keynesian and Monetarist solutions to the stagnation have not resolved Japan's economic issues.
*   Japan's GDP growth has remained sluggish, averaging under 1% from 2011 to 2019.

## Analyzing Japan's Economic Stagnation in the 1990s

The Lost Decade is a term initially coined to refer to the decade-long [economic crisis](https://www.investopedia.com/terms/f/financial-crisis.asp) in Japan during the 1990s. Japan's economy soared after World War II, peaking in the 1980s with the world's largest per capita GNP. Japan's export-led growth during that time attracted capital and led to a [trade surplus](https://www.investopedia.com/terms/t/trade-surplus.asp) with the U.S.

Japan joined other major economies in the 1985 [Plaza Agreement](https://www.investopedia.com/terms/p/plaza-accord.asp) to help balance global trade. In accord with this agreement, Japan embarked on a period of loose monetary policy in the late 1980s. This loose monetary policy spurred [speculation](https://www.investopedia.com/terms/s/speculation.asp) and drove up stock market and real estate values.

In the early 1990s, as it became apparent that the [bubble](https://www.investopedia.com/terms/b/bubble.asp) was about to burst, the Japanese Financial Ministry raised interest rates, and ultimately the stock market crashed and a debt crisis began, halting economic growth and leading to what is now known as the Lost Decade. In the 1990s, Japan's [GDP](https://www.investopedia.com/terms/g/gdp.asp) averaged 1.3%, much lower than other G-7 countries. Household savings rose, but this didn't boost demand, leading to [deflation](https://www.investopedia.com/terms/d/deflation.asp) in the economy.

### Extending Japan's Economic Challenges into the New Millennium

In the next decade, Japan's GDP growth averaged just 0.5% per year, with slow growth continuing until the global financial crisis and [Great Recession](https://www.investopedia.com/terms/g/great-recession.asp). As a result, many refer to the period between 1991 and 2010 as the Lost Score, or the Lost 20 Years.

From 2011 to 2019, Japan's GDP grew an average of just under 1.0% per year, and 2020 marked the onset of a new global recession as governments locked down economic activity in reaction to the [Covid-19 pandemic](https://www.investopedia.com/government-stimulus-and-relief-efforts-to-fight-the-covid-19-crisis-5113980). Together the years from 1990 to the present are sometimes referred to as Japan's Lost Decades.

The pain is expected to continue for Japan. According to research from the [Federal Reserve Bank of St. Louis](https://www.investopedia.com/terms/f/federal-reserve-bank-of-stlouis.asp), recent growth rates imply that Japan's GDP will double in 80 years when previously it doubled every 14 years.

## Investigating the Root Causes of Japan's Economic Downturn

While there is some agreement on the events that led up to and precipitated the Lost Decade, the causes for Japan's sustained economic woes are still being debated. Once the bubble burst and the recession took place, why did persist through successive years and decades? Demographic factors, such as Japan's aging population, and the geopolitical rise of China and other East Asian competitors may be underlying, non-economic factors. Researchers have produced papers delineating possible reasons why the Japanese economy sank into prolonged stagnation.

[Keynesian](https://www.investopedia.com/terms/k/keynesianeconomics.asp) economists have offered several demand-side explanations. Paul Krugman opined that Japan was caught in a [liquidity trap](https://www.investopedia.com/terms/l/liquiditytrap.asp): Consumers were holding onto their savings because they feared that the economy was about to get worse. Other research on the subject analyzed the role played by decreasing household wealth in causing the economic crisis. "Japan's Lost Decade," a 2017 book, blames a "vertical investment-saving" curve for Japan's problems.

[Monetarist](https://www.investopedia.com/terms/m/monetarist.asp) economists have instead pointed to Japan's [monetary policy](https://www.investopedia.com/terms/m/monetarypolicy.asp) before and during the Lost Decade as too restrictive and not accommodative enough to restart growth. Milton Friedman wrote, in reference to Japan, that "the surest road to a healthy economic recovery is to increase the rate of monetary growth to shift from tight money to easier money, to a rate of monetary growth closer to that which prevailed in the golden 1980s but without again overdoing it. That would make much-needed financial and economic reforms far easier to achieve."

Despite these various attempts, Keynesian and Monetarist views on Japan's extended economic malaise generally fall short. Japan's government has engaged in repeated rounds of massive fiscal [deficit spending](https://www.investopedia.com/terms/d/deficit-spending.asp) (the Keynesian's solution to economic depression) and expansionary monetary policy (the Monetarist prescription) without notable success. This suggests that either the Keynesian and Monetarist explanations or solutions (or both) are likely mistaken.

[Austrian economists](https://www.investopedia.com/terms/a/austrian_school.asp) have, on the contrary, argued that a period of extended economic stagnation is not inconsistent with Japan's economic policies that throughout the period acted to prop up existing firms and financial institutions rather than letting them fail and allowing [entrepreneurs](https://www.investopedia.com/terms/e/entrepreneur.asp) to reorganize them into new firms and industries. They point to the repeated economic and financial bailouts as a cause of—rather than a solution to—Japan's Lost Decades.  

## What Is Japan's GDP Growth Rate?

As of the first quarter of 2024, Japan's annual GDP growth rate stood at a negative 0.2 percent compared to the same period one year prior. This indicates that the country's GDP contracted slightly rather than growing.

## How Big Is Japan's Economy?

As of 2024, Japan boasts the world fourth-largest economy, behind the United States, China, and Germany. The country's economy is characterized by a strong manufacturing sector and exports.

## What Is Japan's Lost Generation?

The "Lost Generation" is a concept closely related to Japan's Lost Decades. The term refers to those Japanese university graduates who entered the economy during the employment freezes characteristic of the Lost Decades. This primarily includes people who graduated in the 1990s and 2000s. As a consequence of these circumstances, members of the Lost Generation may have had to take on low-wage temporary work over stable employment with robust retirement benefits—teeing up a potential pension crisis for the nation.

## The Bottom Line

The Lost Decade, also known as the Lost Decades, refers to an extended stretch of economic stagnation and economic collapse in Japan that began in the early 1990s. This era of poor economic performance has been characterized by low GDP growth, recessions, and deflation. Economists have posited multiple views to attempt to understand and explain the root causes of and potential solutions for Japan's economic downturn. These include Keynesian views on liquidity traps, Monetarist perspectives on monetary policy, and Austrian criticisms of government interventions. Japan continues to face economic challenges, such as demographic shifts and increased global competition.

> **Article Sources**
>
> 1.  Asian Development Bank Institute. "[Japan’s Lost Decade: Lessons for Other Economies](https://www.adb.org/sites/default/files/publication/159841/adbi-wp521.pdf)." Accessed June 1, 2021.
>     
> 2.  World Bank. "[GDP Growth (annual %) - Japan](https://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?end=2019&locations=JP&start=1988)," Accessed June 1, 2021.
>     
> 3.  Federal Reserve Bank of St. Louis. "[Japan's Lost Decade vs. the US Great Recession](https://www.stlouisfed.org/on-the-economy/2018/june/japan-lost-decade-us-great-recession)." Accessed June 1, 2021.
>     
> 4.  Massachusetts Institute of Technology. "[Japan's Trap](https://web.mit.edu/krugman/www/japtrap.html)." Accessed June 1, 2021.
>     
> 5.  The National Bureau of Economic Research. "[The Causes of Japan's 'Lost Decade': The Role of Household Consumption](https://www.nber.org/system/files/working_papers/w12142/w12142.pdf)." Accessed June 1, 2021.
>     
> 6.  Naoyuki Yoshino and Farhad Taghizadeh-Hesary, eds. "[Japan's Lost Decade](https://www.springer.com/gp/book/9789811050190)." Springer, 2017.
>     
> 7.  Pragmatic Capitalism. "[Milton Friedman Misunderstood Quantitative Easing](https://www.pragcap.com/milton-friedman-misunderstood-quantitative-easing/)." Accessed June 1, 2021.
>     
> 8.  Mises Institute. "[Explaining Japan's Recession](https://mises.org/library/explaining-japans-recession)." Accessed June 1, 2021.
>     
> 9.  Trading Economics. "[Japan GDP Annual Growth Rate.](https://tradingeconomics.com/japan/gdp-growth-annual)"
>     
> 10.  Associated Press. "[Japan Slips into a Recession and Loses its Spot as the World’s Third-Largest Economy.](https://apnews.com/article/japan-economy-2023-gdp-893d53deba654c4924e4924f0b321cc5)"
>      
> 11.  Nippon. "[Japan and the Lost Generation’s Looming Pension Crisis.](https://www.nippon.com/en/in-depth/a08702/)"