11.1 Economic bubble burst and "Lost Decades"

Japan's economic bubble burst in the late 1980s, causing decades of stagnation. Overvalued assets, risky lending, and speculative investments led to a crash that shook the nation's financial foundation. The Plaza Accord and government policies also played a role.

The aftermath, known as the "Lost Decades," brought low growth, deflation, and employment issues. Japan's government tried various strategies to stimulate the economy, including fiscal packages and "Abenomics," but struggled to achieve sustained growth.

Economic Bubble and Its Collapse

Factors behind Japan's economic bubble burst

Top images from around the web for Factors behind Japan's economic bubble burst

• 

  File:Real GDP growth rate in Japan (1956-2008).png - Wikimedia Commons View original

  Is this image relevant?

• 

  Abenomics: Progress, prospects and how the 2020 Tokyo Olympics can help solve Japan's debt ... View original

  Is this image relevant?

• 

  日本泡沫经济 - 维基百科，自由的百科全书 View original

  Is this image relevant?

• 

  File:Real GDP growth rate in Japan (1956-2008).png - Wikimedia Commons View original

  Is this image relevant?

• 

  Abenomics: Progress, prospects and how the 2020 Tokyo Olympics can help solve Japan's debt ... View original

  Is this image relevant?

1 of 3

Top images from around the web for Factors behind Japan's economic bubble burst

• 

  File:Real GDP growth rate in Japan (1956-2008).png - Wikimedia Commons View original

  Is this image relevant?

• 

  Abenomics: Progress, prospects and how the 2020 Tokyo Olympics can help solve Japan's debt ... View original

  Is this image relevant?

• 

  日本泡沫经济 - 维基百科，自由的百科全书 View original

  Is this image relevant?

• 

  File:Real GDP growth rate in Japan (1956-2008).png - Wikimedia Commons View original

  Is this image relevant?

• 

  Abenomics: Progress, prospects and how the 2020 Tokyo Olympics can help solve Japan's debt ... View original

  Is this image relevant?

1 of 3

• Overvaluation of assets drove real estate prices to skyrocket and stock market reached unsustainable levels (Tokyo's Imperial Palace worth more than all of California)
• Excessive lending by banks implemented easy credit policies and inadequate risk assessment led to risky loans
• Speculative investments encouraged companies to invest heavily in non-core businesses and individuals engaged in risky financial behavior (zaitech)
• Plaza Accord of 1985 led to rapid appreciation of the yen and encouraged monetary easing by the Bank of Japan
• Government policies deregulated financial markets and implemented tax policies favoring land transactions
• Global economic factors caused slowdown in major economies and increased competition from other Asian countries (China, South Korea)

Consequences and Government Response

Consequences of Japan's "Lost Decades"

• Economic stagnation resulted in low GDP growth and persistent deflation (average annual growth rate of 1%)
• Banking crisis created non-performing loans and bankruptcies of major financial institutions (Yamaichi Securities)
• Employment issues led to rise in unemployment and shift towards non-regular employment (part-time, contract work)
• Demographic challenges exacerbated by aging population and declining birth rates (fertility rate dropped to 1.26 in 2005)
• Social impacts increased income inequality and rise of the "freeter" and "NEET" phenomena (young adults without full-time employment)
• Consumer behavior changes reduced spending and increased preference for saving over investment
• Corporate restructuring saw decline of lifetime employment system and increased focus on shareholder value

Government efforts for economic stimulation

• Fiscal stimulus packages funded public works projects and implemented tax cuts (1992 stimulus package of 10.7 trillion yen)
• Monetary policy measures introduced zero interest rate policy and quantitative easing
• Financial system reforms created the Financial Services Agency and injected public funds into banks
• Structural reforms deregulated various sectors and privatized state-owned enterprises (Japan Post)
• "Abenomics" (introduced in 2012) implemented three arrows: monetary easing, fiscal stimulus, and structural reforms
• Effectiveness of measures showed limited success in achieving sustained growth, persistent deflationary pressures, and accumulation of public debt (debt-to-GDP ratio exceeded 200%)

Japan's stagnation vs historical precedents

• Great Depression (1930s) shared similarities in deflation and high unemployment but differed in global scale and severity of decline
• Post-war reconstruction in Europe paralleled need for economic revitalization but contrasted with rapid growth in Europe vs stagnation in Japan
• Latin American debt crisis (1980s) mirrored financial sector issues but diverged with hyperinflation in Latin America vs deflation in Japan
• Asian Financial Crisis (1997) resembled real estate bubble and banking problems but had shorter duration and more severe immediate impact
• Global Financial Crisis (2008) echoed asset bubble burst and financial sector instability but differed in global nature and faster recovery in other countries
• Stagflation in the United States (1970s) shared economic stagnation but contrasted with high inflation in the US vs deflation in Japan