The Lost Decade In Japan
The ‘Lost Decade’ in Japan has become a metaphor for lost potential and economic stagnation nationwide. The term was coined to describe the country’s state of affairs following the bubble economy’s burst in the early 1990s leaving a wake of monumental public debt and a less than promising outlook for a once thriving economy.
Typically, the Lost Decade refers to the period of 1995 to 2005, but several economists and pundits suggest it extended a few more years. During this time, the Land of the Rising Sun dealt with various economic issues, including a widening wealth divide, a decline in the purchasing power of both workers and households, recessionary economic cycles, and slower than usual growth.
It’s been a few decades since these issues first surfaced, but Japan is still struggling to shake its economic woes. Today, we’ll discuss what caused the Lost Decade, assessing the major economic and political factors that determined its course.
Assessment Of The Lost Decade
Before delving into the many factors that contributed to the Lost Decade, let’s take a closer look at some of the major hallmarks of this period.
The lost decade witnessed a crumbling stock market, with 40% of capitalization dropped by 1995. Manufacturing investments were in decline, as was the Yen’s value against other currencies. The Japanese economy was shrinking for nine years, from 1991 to 2000, and in deflationary terms, attempting to correct deflation by maintaining a zero-interest rate was fruitless.
The Lost Decade was characterized by an age of increasing inequality, with the Japanese public economy saddled with an astronomical two quadrillion Yen public debt. Furthermore, banking sector restructuring seemed all but impossible, and coupled with the country’s slowing population growth, it made moving towards and out of economic stagnation all the harder.
Let’s dive deeper and examine some of the major factors that caused the Lost Decade.
Japan’s Real Estate Bubble
One of the main culprits behind Japan’s economic stagnation was its real estate bubble. Starting in the 1980s, property prices soared thanks to vigorous borrowing and large amounts of liquidity. By the time the bubble burst in 1991, many businesses and investors had taken out large loans based on inflated property prices.
In the wake of the bubble burst, Japanese investors were left with enormous debt and were unable to contribute to the economy. Banks, for their part, were inextricably linked to Japan’s property market and had racked up astronomical amounts of bad loans.
Poor Government Policy
The government’s reaction to the real estate bubble’s burst exacerbated the issue, with the policy done little to stimulate the economy. Rather than attempting to persuade banks to offer smaller loans, the government initiated policies to reduce taxes – a decision that encouraged banks to extend more loans with ever-higher interest rates.
Another decision made by Japan’s government that hampered its progress out of the Lost Decade was the Bank Reconstruction and Resolution Corporation. Created in 1998, this institution took over bad loans and even sold these bad credit to ‘disguised’ banks, leading to businesses’ bankruptcy or failure.
Uncompetitive Corporate Structure
Japan’s highly conservative corporate structures made it difficult to compete with other countries. With an emphasis on seniority and corporate loyalty over key skills and job performance, the country’s corporate sensitivity stifled innovation and job creation.
Furthermore, the country’s insular nature meant that globalization posed more of a challenge – both in terms of culture and management. CEOs were reluctant to expand into foreign countries, as this meant that Japanese companies could not stay competitive in different markets.
The Lost Decade has been seen by many as a harbinger for Japan’s economic woes, and it’s true that this period produced turbulent economic times.
By exploring the economic and political factors that led to the Lost Decade, we can see that it was a culmination of unhelpful government policy, a real estate bubble, and an uncompetitive corporate structure that led to its creation.
Thankfully, the Japanese economy has since made strides in making a recovery from the Lost Decade, but it may still be a few years before its impressive pre-1990s economy is fully restored.
