The Lost Decade (失われた10年 Ushinawareta Jūnen)
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The Lost Decade (失われた10年 Ushinawareta Jūnen) is the time after the Japanese asset price bubble's
collapse (崩壊, hōkai) within the Japanese economy, which occurred gradually rather than catastrophically. It
consists of the years 1991 to 2000.[1]
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 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.[2]
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%
and has been for several years. See Sarakin
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.
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.[3] 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 replaced their 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.[4]
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. [5]
Causes
Economist Paul Krugman 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 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.[6]
In response, Japanese policymakers tried a series of government 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.[6]
Economist Richard C. Koo (リチャード・クー Richādo Kū) 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 rates 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.[7][8]
References
1. http://fhayashi.fc2web.com/Prescott1/Postscript_2003/hayashi-prescott.pdf
2. Schuman, Michael (2008-12-19). "Why Detroit Is Not Too Big to Fail"
(http://www.time.com/time/business/article/0,8599,1867847,00.html) . Time Inc..
http://www.time.com/time/business/article/0,8599,1867847,00.html. Retrieved 2008-12-23.
3. New York Times
4. Tabuchi, Hiroko (2009-02-22). "When Consumers Cut Back: An Object Lesson From Japan"
(http://www.nytimes.com/2009/02/22/business/worldbusiness/22japan.html?fta=y) . The New York Times.
http://www.nytimes.com/2009/02/22/business/worldbusiness/22japan.html?fta=y. Retrieved 2010-05-11.
5. [1] (http://online.wsj.com/article/SB123419281562063867.html?mod=djemalertNEWS)
6. a b Krugman, Paul (2009). The Return of Depression Economics and the Crisis of 2008. W.W. Norton Company
Limited. ISBN 978-0-393-07101-6.
7. Koo, Richard (2009). The Holy Grail of Macroeconomics-Lessons from Japan's Great Recession. John Wiley &
Sons (Asia) Pte. Ltd.. ISBN 978-0470-82494-8.
8. Presentation by Richard Koo-The Age of Balance Sheet Recessions-April 2010
(http://www.businessinsider.com/richard-koo-recession-2010-4#-1)
Retrieved from "http://en.wikipedia.org/wiki/Lost_Decade_(Japan)"
Categories: 1990s in Japan | Economic history of Japan | 1990s economic history
This page was last modified on 15 July 2010 at 14:49.
Text is available under the Creative Commons Attribution-ShareAlike License; additional terms may
apply. See Terms of Use for details.
Wikipedia® is a registered trademark of the Wikimedia Foundation, Inc., a non-profit organization.
Brought to you by HedgeWerks Risk Advisory
The Lost Decade (失われた10年 Ushinawareta Jūnen) is the time after the Japanese asset price bubble's
collapse (崩壊, hōkai) within the Japanese economy, which occurred gradually rather than catastrophically. It
consists of the years 1991 to 2000.[1]
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 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.[2]
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%
and has been for several years. See Sarakin
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.
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.[3] 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 replaced their 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.[4]
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. [5]
Causes
Economist Paul Krugman 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 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.[6]
In response, Japanese policymakers tried a series of government 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.[6]
Economist Richard C. Koo (リチャード・クー Richādo Kū) 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 rates 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.[7][8]
References
1. http://fhayashi.fc2web.com/Prescott1/Postscript_2003/hayashi-prescott.pdf
2. Schuman, Michael (2008-12-19). "Why Detroit Is Not Too Big to Fail"
(http://www.time.com/time/business/article/0,8599,1867847,00.html) . Time Inc..
http://www.time.com/time/business/article/0,8599,1867847,00.html. Retrieved 2008-12-23.
3. New York Times
4. Tabuchi, Hiroko (2009-02-22). "When Consumers Cut Back: An Object Lesson From Japan"
(http://www.nytimes.com/2009/02/22/business/worldbusiness/22japan.html?fta=y) . The New York Times.
http://www.nytimes.com/2009/02/22/business/worldbusiness/22japan.html?fta=y. Retrieved 2010-05-11.
5. [1] (http://online.wsj.com/article/SB123419281562063867.html?mod=djemalertNEWS)
6. a b Krugman, Paul (2009). The Return of Depression Economics and the Crisis of 2008. W.W. Norton Company
Limited. ISBN 978-0-393-07101-6.
7. Koo, Richard (2009). The Holy Grail of Macroeconomics-Lessons from Japan's Great Recession. John Wiley &
Sons (Asia) Pte. Ltd.. ISBN 978-0470-82494-8.
8. Presentation by Richard Koo-The Age of Balance Sheet Recessions-April 2010
(http://www.businessinsider.com/richard-koo-recession-2010-4#-1)
Retrieved from "http://en.wikipedia.org/wiki/Lost_Decade_(Japan)"
Categories: 1990s in Japan | Economic history of Japan | 1990s economic history
This page was last modified on 15 July 2010 at 14:49.
Text is available under the Creative Commons Attribution-ShareAlike License; additional terms may
apply. See Terms of Use for details.
Wikipedia® is a registered trademark of the Wikimedia Foundation, Inc., a non-profit organization.