What was Japan’s lost decade?
Between 1991 and 2001, Japan’s once-hot economy was in trouble. An asset bubble formed in both its housing and stock markets, and you could hear the bubble pop when the Bank of Japan implemented a series of steep interest rate hikes to curb inflationary pressures.
Japan’s stock market plunged and asset prices plummeted. Many large banks, over-leveraged by speculative investments, either failed outright or had to be bailed out by the government. Businesses closed and unemployment rose. Japan fell into a decade-long recession.
The country was indeed experiencing a liquidity trap: everything Japan’s central bank tried to help didn’t seem to be working. Interest rates were lowered, but fearing the future, Japan’s citizens sat on their savings instead of spending them.
The government attempted to initiate large-scale public works programs similar to those implemented by US President Franklin Roosevelt during the Great Depression, but this only increased Japan’s budget deficit. Finally, its central bank pumped a huge supply of yen into markets through quantitative easing, which lasted five years. This, along with the resulting inflation, got Japan’s citizens spending again, and the country began a slow recovery.
What caused Japan’s lost decade?
The poster child of 20th-century economic growth, Japan transformed itself from a largely agricultural country in the 1960s to the world’s second-largest economy in the 1980s. Japan found a way to make high-quality products cheaply, products that found their way everywhere.
People played Sony Walkmans in the street and drove Japanese cars around town. Children watched Japanese cartoons on Japanese-made televisions. Movies like Shogun dominated the box office, and corporate success manuals extolled the virtues of “Japan, Inc.” Everyone wanted to know the secret of Japan.
It has a lot to do with how Japan’s businesses are structured. They followed the traditional idea that keiretsu, A close network of business interests centered around a major bank. These groups held majority shareholder interests in each other rather than being funded by stocks or bonds, and this “socially controlled” investment provided the perfect conditions for developing, testing, and perfecting new ideas before bringing them to the larger market.
A well-known one Keiretsu The Mitsubishi Group is made up of MUFG Bank, Mitsubishi Electric, Mitsubishi Heavy Industries and Mitsubishi Corporation. Together, it employs more than 80,000 people in the automotive, energy, chemicals and food industries—essentially acting as its own supply chain.
Throughout the 1970s and 1980s, the Japanese Ministry of International Trade and Industry allowed easy access to credit. Keiretsu, in addition to a period of protection from foreign competition, would give their businesses time to transform into cost-effective manufacturing powerhouses. Once they dominated their respective industries, businesses would embark on export programs, which led to rapid growth in Japan’s electronics, computer, automotive, and aerospace industries.
The stock market boomed hand in hand with Japan’s boom. On December 29, 1989, the Nikkei Stock Average rose to 38,916. In addition, real estate grew incredibly valuable—the price of commercial land rose 300% between 1985 and 1991, and Tokyo’s government claimed that a square mile. This center is worth more than all of California. A bubble formed; It was clear to see.
As property prices rose, speculation increased, particularly in real estate, which was largely financed by corporate stock profits. Banks don’t look twice when lending money. Sometimes no collateral is required. Because Japan’s banks were backed by the government, depositors thought they were in safe hands and, in turn, the banks believed the government would not allow them to fail, so they pooled these deposits into pools of ever-higher interest rates and risks. He sold them to speculators.
Worried about inflationary pressures, the Bank of Japan began a series of steep interest rate hikes, from 2.5% in late 1989 to 4.25% in late 1989, and then to 6% in 1990. Costs were so high that speculators failed to pay off their investments quickly enough.
Japan’s largest number Keiretsu Banks began to fail, threatening to take entire industries with them. The stock market is upside down. By December 1990—just one year from its all-time high—the Nikkei had lost 43% of its value.
What Happened in Japan’s Lost Decade?
Between 1991 and 2001, Japan’s economy entered a deep recession. GDP fell and borrowers went bankrupt. Major banks failed, including Hokkaido Takushoku Bank, Long Term Loan Bank of Japan and Nippon Credit Bank. Long gone are the days of easy loans from banking networks, and as a major consequence, the Keiretsu unwrapped.
Some businesses went under; In others, production simply decreased, but as a result they lost their competitiveness. The country, which once guaranteed employment for life, is now struggling with unemployment – which most notably affects recent graduates and young workers.
Consumer confidence plummeted, demand fell, and deflation took hold—a dangerous combination.
How did Japan recover from the lost decade?
Everything the Bank of Japan tried to do to help seemed to be in vain: interest rates were cut to zero and kept there for a very long time; Still, the recession continued. Land prices in some of Japan’s biggest cities have fallen by 15%, meaning homeowners owe more than their homes are worth.
The Japanese government tried to build confidence with massive stimulus packages. It created new roads and bridges, even when they weren’t absolutely necessary, and thereby created new jobs. These efforts helped boost the economy, but they weren’t enough to lift it out of the doldrums—in fact, in the long run, they increased the nation’s deficit.
What finally helped was that Japan’s central bank was launched in 2001 and lasted until 2006. In 2003, GDP reached a healthy 2%, and exports grew once again, largely due to China’s emergence in the world market, as many of China’s products depended on Japanese components.
What lessons can other economies learn from Japan’s lost decade?
The financial crisis of 2007-2008 had the shadows of Japan’s Last Decade written all over it: this time, the property bubble was created by the US housing market, fueled by toxic subprime mortgages. When the Federal Reserve began a series of interest rate hikes, many subprime borrowers, whose loans were tied to adjustable-rate mortgages, saw their monthly bills rise quickly, and millions of homeowners defaulted as a result.
Banks profited by aggregating these loans into mortgage-backed securities, which were traded by investment banks around the world, and as the mortgages exploded, a series of dominoes began to fall, affecting investors in the stock market rankings: banks experienced a credit crunch, and investment banks such as Lehman Brothers declared bankruptcy. The crisis affected financial markets around the world and would cause a major recession.
Under Ben Bernanke, the Federal Reserve took cues from past crises and acted quickly—in doing so, some say, Bernanke helped avoid the deflation and economic stagnation that had long plagued Japan.
The central bank cut the funds rate to 0% for a 6-year period between 2008 and 2014. The US Congress approved the $700 billion Troubled Asset Relief Program (TARP), which provided emergency aid to banks and underwater borrowers. In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act was passed, protecting consumers from predatory home lenders and limiting the amount of speculative trading that banks can engage in.
The U.S. economy restarted in mid-2009—a quick turnaround compared to Japan’s.