Lost Decade (Japan)
Encyclopedia
The is the time after the Japanese asset price bubble's
collapse within the Japanese economy, which occurred gradually rather than catastrophically. The term originally referred to the years 1991 to 2000, but recently the decade from 2001 to 2010 is also sometimes included, so that the whole period of the 1990s and 2000s is referred to as the Lost Decades or the Lost Years (失われた20年, Ushinawareta Nijūnen).
Recognizing that this bubble was unsustainable, the Finance Ministry
sharply raised interest rates in late 1989. This abruptly terminated the bubble, leading to a massive crash in the stock market. It also led to a debt crisis; a large proportion of the debts that had been run up turned bad, which in turn led to a crisis in the banking sector, with many banks being bailed out by the government.
Michael Schuman
of Time
magazine noted that 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 further bailouts, which led to an economist describing Japan as a "loser's paradise." Schuman states that Japan's economy did not begin to recover until this practice had ended.
Eventually, many became unsustainable, and a wave of consolidation took place, resulting in only four national banks in Japan. Critically for the long-term economic situation, it meant many Japanese firms were burdened with massive debts, affecting their ability for capital investment. It also meant credit became very difficult to obtain, due to the beleaguered situation of the banks; even now the official interest rate is at 0.1% and has been for several years. Many borrowers turned to Sarakin
(loan sharks) for loans.
This led to the phenomenon known as the "lost decade", when economic expansion came to a total halt in Japan during the 1990s. The impact on everyday life was muted, however. Unemployment ran rather high, but not at crisis levels. This has combined with the traditional Japanese emphasis on frugality and saving to produce a quite limited impact on the average Japanese family, which continues much as it did in the period of the miracle.
Despite the economic recovery in the 2000s, most of the conspicuous consumption
of the 1980s, such as spending on whiskey and cars, had not returned. This was due to the traditional Japanese emphasis on frugality and saving, and also because Japanese firms that had dominated the 1980s, such as Sony
and Toyota, were fending off heavy competition from rival companies based in South Korea and Taiwan. Most Japanese companies began to replace their permanent work force with temporary workers who had no job security and fewer benefits, and these non-traditional employees now make up over a third of Japan’s labor force.
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.
has described Japan's lost decade as a liquidity trap
, in which consumers and firms saved too much overall, causing the economy to slow. 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.
In response, Japanese policymakers tried a series of government economic stimulus programs and bank bailouts. A 2.4% budget surplus in 1991 turned to a deficit of 4.3% by 1996 and 10% by 1998, with the national debt to GDP ratio reaching 100%. In 1998, a $500 billion bank rescue plan was implemented to encourage bank lending and borrowing. The central bank also attempted to increase inflation (which devalues savings over time), to encourage consumer spending. Krugman wrote that by 2003, the Japanese economy began to recover, helped by imports from the U.S. and China that helped Japan achieve a real growth rate of 2%. He wrote the recovery was "provisional" and there was significant risk of a return to a liquidity trap.
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 rate
s 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 criticizes Japan's very tight monetary policy during the Lost Decade.
Japanese asset price bubble
The was an economic bubble in Japan from 1986 to 1991, in which real estate and stock prices were greatly inflated. The bubble's collapse lasted for more than a decade with stock prices initially bottoming in 2003, although they would descend even further amidst the global crisis in 2008. The...
collapse within the Japanese economy, which occurred gradually rather than catastrophically. The term originally referred to the years 1991 to 2000, but recently the decade from 2001 to 2010 is also sometimes included, so that the whole period of the 1990s and 2000s is referred to as the Lost Decades or the Lost Years (失われた20年, Ushinawareta Nijūnen).
Overview
The strong economic growth of the 1980s ended abruptly at the start of the 1990s. In the late 1980s, abnormalities within the Japanese economic system had fueled a massive wave of speculation by Japanese companies, banks and securities companies. A combination of exceptionally high land values and exceptionally low interest rates briefly led to a position in which credit was both easily available and extremely cheap. This led to massive borrowing, the proceeds of which were invested mostly in domestic and foreign stocks and securities.Recognizing that this bubble was unsustainable, the Finance Ministry
Ministry of Finance (Japan)
The ' is one of cabinet-level ministries of the Japanese government. The ministry was once named Ōkura-shō . The Ministry is headed by the Minister of Finance , who is a member of the Cabinet and is typically chosen from members of the Diet by the Prime Minister.The Ministry's origin was back in...
sharply raised interest rates in late 1989. This abruptly terminated the bubble, leading to a massive crash in the stock market. It also led to a debt crisis; a large proportion of the debts that had been run up turned bad, which in turn led to a crisis in the banking sector, with many banks being bailed out by the government.
Michael Schuman
Michael Schuman
Michael Schuman is an American author and journalist who specializes in Asian economics, politics and history. He is currently the Asia business correspondent for TIME Magazine, based in Hong Kong...
of Time
Time (magazine)
Time is an American news magazine. A European edition is published from London. Time Europe covers the Middle East, Africa and, since 2003, Latin America. An Asian edition is based in Hong Kong...
magazine noted that banks kept injecting new funds into unprofitable "zombie firms
Zombie company
Zombie company is a media term for a company that needs constant bailouts in order to operate. There are several types of zombie companies. The term regained popularity in the media during 2008 for companies receiving bailouts from the U.S. Troubled Asset Relief Program...
" to keep them afloat, arguing that they were too big to fail
Too Big to Fail
Too Big to Fail is a television drama film in the United States broadcast on HBO on May 23, 2011. It is based on the non-fiction book Too Big to Fail by Andrew Ross Sorkin. The TV film was directed by Curtis Hanson...
. However, most of these companies were too debt-ridden to do much more than survive on further bailouts, which led to an economist describing Japan as a "loser's paradise." Schuman states that Japan's economy did not begin to recover until this practice had ended.
Eventually, many became unsustainable, and a wave of consolidation took place, resulting in only four national banks in Japan. Critically for the long-term economic situation, it meant many Japanese firms were burdened with massive debts, affecting their ability for capital investment. It also meant credit became very difficult to obtain, due to the beleaguered situation of the banks; even now the official interest rate is at 0.1% and has been for several years. Many borrowers turned to Sarakin
Sarakin
is a Japanese term for a legal moneylender who makes unsecured loans at high interest. It is a contraction of the Japanese words for salaryman and loan...
(loan sharks) for loans.
This led to the phenomenon known as the "lost decade", when economic expansion came to a total halt in Japan during the 1990s. The impact on everyday life was muted, however. Unemployment ran rather high, but not at crisis levels. This has combined with the traditional Japanese emphasis on frugality and saving to produce a quite limited impact on the average Japanese family, which continues much as it did in the period of the miracle.
Despite the economic recovery in the 2000s, most of the conspicuous consumption
Conspicuous consumption
Conspicuous consumption is spending on goods and services acquired mainly for the purpose of displaying income or wealth. In the mind of a conspicuous consumer, such display serves as a means of attaining or maintaining social status....
of the 1980s, such as spending on whiskey and cars, had not returned. This was due to the traditional Japanese emphasis on frugality and saving, and also because Japanese firms that had dominated the 1980s, such as Sony
Sony
, commonly referred to as Sony, is a Japanese multinational conglomerate corporation headquartered in Minato, Tokyo, Japan and the world's fifth largest media conglomerate measured by revenues....
and Toyota, were fending off heavy competition from rival companies based in South Korea and Taiwan. Most Japanese companies began to replace their permanent work force with temporary workers who had no job security and fewer benefits, and these non-traditional employees now make up over a third of Japan’s labor force.
On February 9, 2009, in warning of the dire consequences facing the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
economy
Economy of the United States
The economy of the United States is the world's largest national economy. Its nominal GDP was estimated to be nearly $14.5 trillion in 2010, approximately a quarter of nominal global GDP. The European Union has a larger collective economy, but is not a single nation...
after its housing bubble
United States housing bubble
The United States housing bubble is an economic bubble affecting many parts of the United States housing market in over half of American states. Housing prices peaked in early 2006, started to decline in 2006 and 2007, and may not yet have hit bottom as of 2011. On December 30, 2008 the...
, U.S. President Barack Obama
Barack Obama
Barack Hussein Obama II is the 44th and current President of the United States. He is the first African American to hold the office. Obama previously served as a United States Senator from Illinois, from January 2005 until he resigned following his victory in the 2008 presidential election.Born in...
cited the "lost decade" as a prospect the American economy faced.
Interpretations
Economist Paul KrugmanPaul Krugman
Paul Robin Krugman is an American economist, professor of Economics and International Affairs at the Woodrow Wilson School of Public and International Affairs at Princeton University, Centenary Professor at the London School of Economics, and an op-ed columnist for The New York Times...
has described Japan's lost decade as a liquidity trap
Liquidity trap
A liquidity trap is a situation described in Keynesian economics in which injections of cash into an economy by a central bank fail to lower interest rates and hence to stimulate economic growth. A liquidity trap is caused when people hoard cash because they expect an adverse event such as...
, in which consumers and firms saved too much overall, causing the economy to slow. 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
Moral hazard
In economic theory, moral hazard refers to a situation in which a party makes a decision about how much risk to take, while another party bears the costs if things go badly, and the party insulated from risk behaves differently from how it would if it were fully exposed to the risk.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.
In response, Japanese policymakers tried a series of government economic stimulus programs and bank bailouts. A 2.4% budget surplus in 1991 turned to a deficit of 4.3% by 1996 and 10% by 1998, with the national debt to GDP ratio reaching 100%. In 1998, a $500 billion bank rescue plan was implemented to encourage bank lending and borrowing. The central bank also attempted to increase inflation (which devalues savings over time), to encourage consumer spending. Krugman wrote that by 2003, the Japanese economy began to recover, helped by imports from the U.S. and China that helped Japan achieve a real growth rate of 2%. He wrote the recovery was "provisional" and there was significant risk of a return to a liquidity trap.
Economist Richard Koo
Richard Koo
Richard C. Koo is a Taiwanese economist residing in Japan specializing in balance sheet recessions. He is Chief Economist at the Nomura Research Institute.- Publications :...
wrote that Japan's "Great Recession" that began in 1990 was a "balance sheet
Balance sheet
In financial accounting, a balance sheet or statement of financial position is a summary of the financial balances of a sole proprietorship, a business partnership or a company. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A...
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 rate
Interest rate
An interest rate is the rate at which interest is paid by a borrower for the use of money that they borrow from a lender. For example, a small company borrows capital from a bank to buy new assets for their business, and in return the lender receives interest at a predetermined interest rate for...
s 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
Great Depression
The Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...
, 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 criticizes Japan's very tight monetary policy during the Lost Decade.
See also
- Japanese post-war economic miracleJapanese post-war economic miracleThe Japanese post-war economic miracle is the name given to the historical phenomenon of Japan's record period of economic growth following World War II, spurred mainly by Japanese economic policy, in particular through the Ministry of International Trade and Industry...
- Economic history of JapanEconomic history of JapanThe economic history of Japan is one of the most studied for its spectacular growth after the Meiji Restoration when it became the first non-European Power and after the Second World War when the island nation rose to become the world's second largest economy....
- Zero interest rate policyZero interest rate policyThe zero interest rate policy is a macroeconomic concept describing conditions with a very low interest rate, such as contemporary Japan and, since December 16, 2008, the United States. It can be associated with slow economic growth....