Lost Decades

This article is about the Japanese economic crisis. For other uses, see Lost Decade.

The Lost Decade (失われた10年, Ushinawareta Jūnen) was a period of economic stagnation in Japan caused by the asset price bubble's collapse in late 1991. The term originally referred to the 1990s,^[1] but the 2000s (Lost 20 Years, 失われた20年)^[2] and the 2010s (Lost 30 Years, 失われた30年)^[3][4][5] have been included by commentators as the phenomenon continued.^[4]

From 1991 to 2003, the Japanese 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 other industrialized nations.^[6][4] Debt levels continued to rise in response to the financial crisis in the Great Recession in 2008, Tōhoku earthquake and tsunami and Fukushima nuclear disaster in 2011, the COVID-19 pandemic, the subsequent recession in January 2020 and October 2021.

Broadly impacting the entire Japanese economy, over the period of 1995 to 2007, the country's GDP fell from $5.33 trillion to $4.36 trillion in nominal terms,^[7] real wages fell around 5%,^[8] while the country experienced a stagnant price level.^[9] While there is some debate on the extent and measurement of Japan's setbacks,^[10][11] the economic effect of the Lost Decades is well established, and Japanese policymakers continue to grapple with its consequences.

Causes

See also: Japanese asset price bubble

 

Japan bonds, inverted yield curve in 1990

  30 year

  20 year

  10 year

  5 year

  2 year

  1 year

 

Japan money supply and inflation (year over year)

  M2 money supply

  Inflation

 

Japan property prices (year over year)

Japan's economic miracle in the second half of the 20th century ended abruptly at the start of the 1990s. By the late 1980s, the Japanese economy experienced an 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".^[12][13] 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."^[14] Economist Richard Werner writes that external pressures such as the Plaza Accord and the policy of Ministry of Finance to reduce the official discount rate are insufficient in explaining the actions taken by the Bank of Japan.^[12][13]

 

Nikkei 225 Index

Trying to deflate speculation and keep inflation in check, the Bank of Japan sharply raised inter-bank lending rates in late 1989.^[15] 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. As a result, bank credit growth stagnated.^[16] 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.^[17] Additionally, Michael Schuman of Time magazine wrote 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.^[18]

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%;^[19] the interest rate has remained below 1% since 1994.^[20]

Economic effects

Despite mild economic recovery in the 2000s, conspicuous consumption of the 1980s has not returned to the same pre-crash levels. Japanese firms such as Toyota, Sony, Panasonic, Sharp, and Toshiba, 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, particularly South Korea, and China, since the 2000s. In 1989, of the world's top 50 companies by market capitalization, 32 were Japanese; by 2018, only one such company (Toyota) remains in the top 50.^[21] 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.^[22] 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 the Ministry of Health, Labour and Welfare showed that household income in 2010 had fallen to 1987 levels.^[23] 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.^[24]

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.^[25] In the span of 30 years, Japan also experienced slower labor productivity growth than other countries. Whereas in 1990 it ranked sixth among G7 nations ahead of the United Kingdom, in 2021 labor productivity of Japan was the lowest in the G7 and ranked 29th of 38 OECD members.^[26]

In response to chronic deflation and low growth, Japan has attempted economic stimulus and thereby run a fiscal deficit since 1991.^[27] 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.^[27] 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. 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 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.^[28] Initially, 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 initial successes has been hampered by a sales tax increase enacted to balance the government budget.^[29] However, the impact on wages and consumer sentiment was more muted. A Kyodo News poll 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.^[30]

In early 2020, as Japan began to suffer from the COVID-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.^[31]

Interpretation

Economist Paul Krugman has argued that Japan's lost decades are an example of a liquidity 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 significant moral hazard problem, leading to an atmosphere of crony capitalism and 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.^[14]

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. 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.^[32][33]

Economist Scott Sumner has argued that Japan's monetary policy was too tight during the Lost Decades and thus prolonged the pain felt by the Japanese economy.^{[34][35][36][37]}

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.^[38][39]

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][40]} 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.^[41]

Legacy

After the Great Recession of 2007–2009, many Western governments and commentators have referenced the Lost Decades as a distinct economic possibility for stagnating developed nations. On February 9, 2009, in warning of the dire consequences facing the US economy after its housing bubble, U.S. President Barack Obama cited the "lost decades" as a prospect the American economy faced.^[42] 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."^[43]

See also

•  1990s portal
•  2000s portal
•  2010s portal

• 1997 Asian financial crisis
• Economic history of Japan
• Economic stagnation
• Employment Ice Age
• Great Recession
• Japanese post-war economic miracle
• Princes of the Yen: book by Richard Werner about the macroeconomics behind the Lost Decade
• Zero interest rate policy

References

1. "Hayashi Prescott" (PDF).
2. Leika Kihara (August 17, 2012). "Japan eyes end to decades long deflation". Reuters. Retrieved September 7, 2012.
3. "円は一段と上昇か、日本は次の失われた10年に直面－ムーディーズ". Bloomberg.com (in Japanese). 17 June 2016. Retrieved 2020-10-18.
4. "「失われた30年」に向かう日本". Newsweek日本版 (in Japanese). 2010-12-23. Retrieved 2020-10-18.
5. "「失われた30年」となる可能性も 次の10年を考えて投資しよう". MONEYzine (in Japanese). Retrieved 2020-10-18.
6. Nielsen, Barry. "The Lost Decade: Lessons From Japan's Real Estate Crisis". Investopedia. Retrieved 2020-05-26.
7. "Japanese GDP, nominal".
8. "Waging a New War". March 9, 2013.
9. "Inflation Japan - CPI inflation".
10. Fingleton, Eamonn (January 6, 2012). "The Myth of Japan's Failure". The New York Times.
11. Fingleton, Eamonn (January 12, 2012). "Video interview on BBC News with Eamonn Fingleton". BBC News, 5 min. 26 sec.
12. Werner, Richard (2005). New Paradigm in Macroeconomics. doi:10.1057/9780230506077. ISBN 978-1-4039-2074-4.
13. Werner, Richard A. (2002). "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.
14. Krugman, Paul (2009). The Return of Depression Economics and the Crisis of 2008. W.W. Norton Company Limited. ISBN 978-0-393-07101-6.
15. "Japan Raised Interest Rates". Reuters via The New York Times. December 25, 1989.
16. Princes of the Yen. Japan's Central Bankers and the Transformation of the Economy. quantumpublishers.com. 2003.
17. Onaran, Yalman (2011-11-25). "Kill the zombie banks!". Salon Media Group. Retrieved 2013-01-16.
18. Schuman, Michael (2008-12-19). "Why Detroit Is Not Too Big to Fail". Time Inc. Retrieved 2008-12-23.
19. Ohno, Kenichi. "Economic Development of Japan". National Graduate Institute for Policy Studies. Retrieved 3 April 2011.
20. "Bank of Japan Interest Rates".
21. "昭和という「レガシー」を引きずった平成30年間の経済停滞を振り返る". ダイヤモンド・オンライン (in Japanese). 20 August 2018. Retrieved 2020-10-18.
22. Tabuchi, Hiroko (2009-02-22). "When Consumers Cut Back: An Object Lesson From Japan". The New York Times. Retrieved 2010-05-11.
23. "世帯所得、昭和に逆戻り…10年平均538万円". 日本経済新聞 電子版 (in Japanese). 5 July 2012. Retrieved 2020-10-18.
24. 田中秀臣 『日本経済復活が引き起こすAKB48の終焉』 主婦の友社、2013年、84頁。
25. "The Japanese Tragedy". The Economist Blog.
26. "労働生産性の国際比較 | 調査研究・提言活動". 公益財団法人日本生産性本部 (in Japanese). Retrieved 2023-10-17.
27. "Don't Mention the Debt". May 4, 2013.
28. "The third arrow". June 28, 2014.
29. "Inflation in Japan rises to 30-year high". June 27, 2014. Archived from the original on 2022-01-12.
30. . AFP. 27 January 2014. Archived from the original on 2 February 2014. Retrieved 28 January 2014.
31. Huang, Eustance (7 April 2020). "Japan's economy has been dealt the 'final blow' by the coronavirus pandemic, says analyst". CNBC. Retrieved 7 April 2020.
32. 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.
33. White, Gregory. "Richard Koo's Awesome Presentation On The Real Reason Why This Recession Is Completely Different". Business Insider.
34. Sumner, Scott. "Why Japan's QE didn't "work"". The Money Illusion. Retrieved November 24, 2014.
35. Sumner, Scott. "More evidence that the BOJ is not trying to create inflation". The Money Illusion. Retrieved November 24, 2014.
36. Sumner, Scott. "Rooseveltian Resolve". The Money Illusion. Retrieved November 24, 2014.
37. Sumner, Scott. "The other money illusion". The Money Illusion. Retrieved November 24, 2014.
38. Hayashi, Fumio; Prescott, Edward (2002). "The 1990s in Japan: A Lost Decade". Review of Economic Dynamics. 5 (1): 206–235. doi:10.1006/redy.2001.0149.
39. Dept, International Monetary Fund External Relations (2002-01-01). "Interview with Edward Prescott: Japan's prolonged slowdown parallels sharp decline in productivity growth". IMF Survey. 31 (6). doi:10.5089/9781451934359.023.A005 (inactive 2023-08-30).{{cite journal}}: CS1 maint: DOI inactive as of August 2023 (link)
40. Amyx, Jennifer (2004). Japan's Financial Crisis: Institutional Rigidity and Reluctant Change. Princeton University Press. pp. 17–18.
41. Lustick, Ian (2011). "Institutional Rigidity". Cliodynamics. 2 (2).
42. Meckler, Laura; Weisman, Jonathan (2009-02-10). "Obama Warns of 'Lost Decade'". The Wall Street Journal.
43. The Seven Faces of 'The Peril' Federal Reserve Bank of St. Louis

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)
• 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 Review 63.1 (2015): 110–163. online