What Is the Lost Decade?
Let me tell you about the Lost Decade—it's a term that describes a long stretch of economic stagnation in Japan starting in the early 1990s, marked by low growth and deflation, which created ongoing economic hurdles.
You might hear it called the Lost Decade for the 1990s specifically, but some extend it to include later years, referring to the period from 1991 through 2011 or even up to 2021 as Japan's Lost Decades.
Key Takeaways
- The Lost Decade originally meant an extended period of slow to negative economic growth in Japan during the 1990s, lasting nearly ten years.
- Ongoing stagnant growth has led to the term Lost Decades for the period since 1991.
- Misguided government policies responding to a real estate bubble are seen as the main causes.
- In the U.S., the first decade of the 21st century, with its stock market crashes, is often compared to Japan's Lost Decade.
Understanding the Lost Decade
The term Lost Decade was first used for Japan's economic crisis in the 1990s. After World War II, Japan's economy skyrocketed, hitting the world's highest per capita GNP in the 1980s. Its export-driven growth pulled in capital and created a trade surplus with the U.S.
To address global trade imbalances, Japan signed the Plaza Accord in 1985 with other major economies. This led to loose monetary policy in the late 1980s, fueling speculation and skyrocketing stock and real estate prices.
By the early 1990s, as the bubble showed signs of bursting, the Japanese Finance Ministry hiked interest rates. The stock market crashed, a debt crisis hit, and economic growth stopped— that's what we now call the Lost Decade. In the 1990s, Japan's GDP averaged just 1.3%, far below other G-7 nations. Households saved more, but that didn't boost demand, leading to deflation.
The Lost Decades
In the next decade, Japan's GDP growth averaged only 0.5% per year, with slow growth continuing until the global financial crisis. That's why many call 1991 to 2010 the Lost Score or Lost 20 Years.
From 2011 to 2019, growth was just under 1.0% annually, and 2020 brought a new recession from COVID-19 lockdowns. Overall, from 1990 onward, it's often labeled Japan's Lost Decades.
The issues persist—research from the Federal Reserve Bank of St. Louis shows that at current rates, Japan's GDP will double in 80 years, compared to every 14 years before.
What Caused The Lost Decade?
Experts agree on the lead-up events, like the bubble burst and recession, but debate why the stagnation lasted so long. Factors like Japan's aging population and competition from China and East Asia might play non-economic roles. Researchers have explored various reasons for the prolonged slump.
Keynesians point to demand-side issues. Paul Krugman argued Japan was in a liquidity trap, where people saved out of fear of worse times. Other studies link it to falling household wealth. A 2017 book blames a 'vertical investment-saving' curve.
Monetarists say monetary policy was too tight and not expansive enough. Milton Friedman suggested increasing monetary growth to match the 1980s without excess, making reforms easier.
But these views often fall short—Japan tried massive fiscal spending (Keynesian) and expansionary monetary policy (Monetarist) without success, suggesting flaws in those explanations or solutions.
Austrian economists argue that propping up failing firms and banks through bailouts prevented necessary reorganizations, causing rather than solving the stagnation.
What Is Japan's GDP Growth Rate?
As of Q1 2024, Japan's annual GDP growth was -0.2% compared to the prior year, meaning a slight contraction instead of growth.
How Big Is Japan's Economy?
In 2024, Japan has the world's fourth-largest economy, after the U.S., China, and Germany, with strengths in manufacturing and exports.
What Is Japan's Lost Generation?
The Lost Generation ties into the Lost Decades— it refers to university graduates entering the job market during employment freezes in the 1990s and 2000s. They often ended up in low-wage temp jobs instead of stable careers with good benefits, potentially leading to a pension crisis.
The Bottom Line
To wrap this up, the Lost Decade—or Lost Decades—covers Japan's economic stagnation from the early 1990s, with low GDP growth, recessions, and deflation. Economists offer various theories on causes and fixes for this downturn.
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