Lost Decade (Japan) - History

History

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 speculative asset price bubble of massive scale by Japanese companies, banks and securities companies. The combination of exceptionally high land values and low interest rates briefly resulted in heightened liquidity in the market. It led to massive borrowing and heavy investment mostly in domestic and foreign stocks and securities.

Recognizing that this bubble was unsustainable, the Bank of Japan sharply raised interest rates in late 1989. This sharp policy caused the bursting of the bubble, and the stock market crashed. A debt crisis followed and the Japanese banks and insurances were now loaded with bad debts. The financial institutions were bailed out through capital infusions from the government, loans from the central bank and the ability to postpone the recognition of losses, ultimately turning them into zombie banks. Yalman Onaranof of Salon stated that the zombie banks were one of the reasons for the following stagnation. Additionally Michael Schuman of Time magazine noted 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%; it has been similarly low for several years.)

The 1990s therefore was the "lost decade" when the economy contracted or grew at a paltry rate. The impact on everyday life was muted, however. Unemployment rates were high, but not at a crisis level. With the traditional Japanese emphasis on frugality and saving, an impact on an average Japanese family was quite limited, whose standard of living did not deteriorate significantly from what it was in the 1980s.

Despite the economic recovery in the 2000s, conspicuous consumption of the 1980s such as lavish spending on whiskey and cars did not return for the most part. Difficult times in the 1990s made people frown on ostentatious display of wealth, while Japanese firms such as Toyota and Sony which had dominated the industry in the 1980s had to fend off strong competition from rival firms based in other East Asian countries, especially South Korea. Many Japanese companies replaced a large part of their workforce with temporary workers, who had little job security and fewer benefits. As of 2009, these non-traditional employees made up more than a third of the labor force. As of August 2012, the nation's economy has not fully recovered from the 1991 crash.