Lost Decades
The Lost Decades are a lengthy period of economic stagnation in Japan precipitated by the asset price bubble's collapse beginning in 1990. The singular term Lost Decade originally referred to the 1990s, but the 2000s and the 2010s have been included by commentators as the phenomenon continued.
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. Debt levels continued to rise due to the 2008 financial crisis and the Great Recession, the 2011 Tōhoku earthquake and tsunami, the Fukushima nuclear disaster, and the COVID-19 pandemic and COVID-19 recession. Broadly impacting the entire Japanese economy, over the period of 1995 to 2025, the country's nominal GDP fell from $5.55 trillion to $4.27 trillion, real wages fell around 11%, while the country experienced a stagnant or decreasing price level. From 1995 to 2025, Japan's share of the world's nominal GDP decreased from 17.8% to 3.6%.
Under deflation, 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 the aging population, gradually diminished the competitiveness of the economy and the potential growth rate of the country. The Bank of Japan and the Japanese government have 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 lower bound.
In 2013, BoJ implemented the Quantitative and Qualitative Monetary Easing Policy, and in 2016, it introduced a negative bank rate of −0.1%. This policy achieved mild inflation of around 0–1.0% in the late 2010s. The global inflation surge from 2021 to 2023 finally 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, the Japanese yen has become extremely weak, hitting a 37.5-year low of 161 yen/USD in July 2024. The real effective exchange rate was at 68.36 in June 2024, the lowest level since statistics began in 1970, with the 2020 average set at 100. This devaluation of the currency caused Japan to lose its status as the world's third largest economy to Germany in nominal terms, which was approximately half the size of the country's economy a decade earlier.
While there is some debate on the extent and measurement of Japan's setbacks, the economic effect of the Lost Decades is well established, and Japanese policymakers continue to grapple with its consequences.
Causes
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 caused by loan growth quotas dictated upon 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." 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 to explain the actions taken by the Bank of Japan.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. As a result, bank credit growth stagnated. The financial institutions were bailed out through capital infusions from the Government of Japan, 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 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.
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 for loans. As of 2012, the official interest rate was 0.1%; the interest rate has remained below 1% since 1994.
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 remains in the top 50. 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 fell around 13% by 2013, an unprecedented number among developed nations. Surveys by the Ministry of Health, Labour and Welfare showed that household income in 2010 had fallen to 1987 levels. 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.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 1995, Japan had a nominal GDP per capita of $44,210, the world's third highest behind Luxembourg and Switzerland, while by 2025, it had fallen to $34,713, the 36th in the world. 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 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. ; Japan's nominal GDP and GDP per capita remains smaller than its 1995 levels.
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 had the highest level of debt of any nation on earth as of 2013. 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 Shinzō 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. 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. 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.
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. In February 2024, Nikkei 225 reached 39,098.68, the highest point in the Lost Decades and higher than the bubble era. While Jiji Press stated that Japan has escaped from the Lost Decades, Kasuo Mannma, executive economist of Mizuho Information & Research Institute, opposed the "escaped" claim by citing GDP growth rates and consumer spending and indicated that the Nikkei point is benefited from Japanese companies' corporate reform instead of economic growth in Japan. Nippon.com also cites the loss of Tokyo market and Japan's slow growing nominal GDP, and issues on demographics and national debt.