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 (失われた10年, Ushinawareta Jūnen) originally referred to the 1990s, but the 2000s (Lost 20 Years, 失われた20年) and the 2010s (Lost 30 Years, 失われた30年) 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 (BoJ) 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.

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 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 (loan sharks) for loans. As of 2012, the official interest rate was 0.1%; the interest rate has remained below 1% since 1994.