Lost Decade In Japan: Myth Or Reality

Causes of the Lost Decade

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In the international economic scenario, along with the already existing global economic giants like the USA, China, the European Union and others, one of the economies of immense interesting development and with unique characteristics very much subjective to the country itself, is the economy of Japan. The economy of Japan, in terms of nominal GDP management, ranks third in the international scenario (Lockwood 2015). The country has experienced immense economic turmoil over the years, which were mostly attributed to the societal and international phenomena like the constant lingering of the nuclear problem, as well as natural calamities like frequent earthquakes as well as tsunamis of huge magnitude, which the country experienced over the past centuries.

However, the country has bounced back from every hostile situations and has emerged as the second largest developed country, much of which can be attributed to the stability mechanism and the economic strategies taken by the governing authorities of the country (Dore 2013). There are evidences of periods of busts and booms in the economy, one of which is the period between 1991 to 2000, which is popularly known as the Lost Decade in Japan, in the international economic scenario. In simple words, the Lost Decade refers to a period of acute slowdown and stagnation of the economy of the country.

However, there are substantial debates regarding the actual implications of the Lost Decade on the economy of Japan and there are substantial arguments both in favor and against the argument regarding the widely talked about failure of the economy during this period (Kneller et al. 2012). The essay tries to analyze whether the economy of Japan actually failed in the so called Lost Decade or whether this theory is just a myth.

The popular notion of the Lost Decade refers specifically to the time period of 1991 to 2000, in the context of the economy of Japan. The economists and the speculators in the global economy use the term “Lost Decade” metaphorically, because during this period the country’s economy faced an overall slowdown in terms of overall productivity, growth and GDP statistics. There are various views regarding the events, which led to the initiation of this recessionary period in Japan and the magnitude and duration of the persistence of the problem. However, in general the economists across the world agree to one primary causal incident, which contributed significantly to the initiation of the Lost Decade in the economy (Aoki 2013).

The Myth of the Lost Decade

The economy of Japan, in spite of all the severe economic, political and natural hurdles, managed to prosper considerably in the second half of the twentieth century and emerged as one of the potential economic giant in the global economic scenario. The growth of the economy however was stalled abruptly in the beginning of 1990, which was apparently the initiation of the following prolonged economic sufferings for the country in the decade following. The primary and broadly agreed reason behind this stagnation was the bursting of the bubble in the asset market of the economy (Wakatabe 2012).

The high growth potential of the country prior to the period of crisis led to an immense confidence of the investors in the economy and also the banking sector of Japan. The banks in the country started lending more to facilitate aggregate spending and investments, especially in the asset market of the country. The excessive quotas of loan growth as designed by the Central Bank on the other banks in the economy of the country contributed substantially in creating a substantial burden of loan. While lending, there were less restrictions and regulations regarding the quality of the borrowers and the banks did not have adequate monitoring process to check about the credibility of the borrowers and only concentrated on increasing the quantity of loan (Miyazawa 2012).

This in its turn increased the price levels in the asset market which contributed in creating massive speculations about a price bubble in the asset market of the economy. To rule out this speculation and to stop the economy from entering into a high inflationary period, the monetary policies were designed so as to increase the inter-bank lending rate, which in turn led to the bursting of the bubble in the asset market in the country. This in turn led to a huge and unprecedented crash in the stock market as a result of the drastic fall in the price of assets in the market management (Corbett 2012).

The result of this crash was s huge defaulting of debts by the borrowers and the banks and the financial institutions started reeling under the pressure of massive amounts of bad debts. The situations of the commercial banks were to some extent pacified by the economic policies then taken by the monetary authorities of the country, which includes infusions of capital and loans from the central banks to bail out the commercial banks (Hurt).

The recessionary situation in the economy had considerable implications on the growth and well-being of the country as a whole, mostly negative. As has been portrayed by the economists across the world, especially by those in the developed western economies, the crash in the stock market, resulting from the bursting of the asset market bubble, led to a huge stagnation in the economic growth of the country as the entire economy slowed down for a prolonged period of time. According to many of the economists across the world, the effects of the bursting of the price bubble and the stock market crash took a long time to wither out from the economy of the country. Some economists even argue that the country has still not been able to come out completely of the adverse effects of the same and of the resulting Lost Decade in Japan (GUINEA 2014).

The Lost Decade is popularly talked about and referred to as a dark phase in the economy of the country by many eminent economists. However, there are substantial debates regarding how massive and prolonged were the effects of this bursting of bubble and the stock market crash on the overall economy and if there is actually any evidence of the Lost Decade in real economic scenario of the country. Many economists, especially those working extensively in the field of economic growth of the Asian countries, argue that the concept of the Lost Decade and economic stagnation of the country during the period of 1991 to 2000 is overestimated and wrongly interpreted (Nytimes.com, 2017). According to this school of thought, though the bursting of the price bubble actually happened and though there was definitely a crash in the stock market of the economy, however, the effects of the adverse phenomenon was not that adverse on the overall economy of Japan and the country performed significantly well in face of such a turmoil situation. There are empirical evidences too in this aspect, which shows that the notion of the Lost Decade and the failure of the economy of Japan could have been a bit of an overhyped one (Funabashi and Kushner 2015).

There are empirical evidences, articles and reports, based on the study findings of many researchers, which show that though the stock market and the investment statistics fell significantly, the overall lifestyle of the people in Japan did not deteriorate to noticeable extent. In fact, the standard of living of the people of the country actually went on improving during that period which is otherwise known as the Lost Decade in the economic history of Japan (Lechevalier 2014).

In general, with the initiation or occurrence of such a hostile economic phenomenon as that of the bursting of the bubble in the asset market in the country, the economy of the country goes into stagnation, which directly shows in the GDP and GDP growth statistics of the country in that period and in the succeeding periods (Witt 2014).

As can be seen from the above figure, the GDP of the country grew impressively from 1980 till 1994 and after that the same fell but the fall in the GDP was not to such massive extent and the country quickly recovered and with several small fluctuations and the overall trend of the GDP growth remained positive. This trend in the growth of GDP contradicts the propositions of the stagnation of the economy of Japan during the time period of 1990 to 2000. The huge crash in the stock market following the bursting of the bubble in the asset market in the country did not affect the economic growth of the country to that adverse extent as many of the economists speculated (Todaro and Smith 2012).

The above figure showing the GDP growth rate of the country between 1980 to 2005 shows that there has always been a fluctuation in the growth rate of the GDP of the country, the fluctuations maintaining a consistency and not deviating to that extent which is distinctly noticeable. There are evidences of greater fluctuations in the growth rate of the Gross Domestic Product of the country during the time span of 1990-1992 (Allen 2013). The drastic short time fall in the growth rate of the GDP of the country in1990 can be attributed to the bursting of the bubble. However, the fall was short spanned as it was accompanied by an equal increase in the growth rate of the GDP of the country. After this the fluctuations in the growth rate of the country maintained a consistency and there was no strikingly observable positive or negative fluctuations in the same which in its turn indicates that the bubble burst though affected the economy (Rodrik 2014).

The overall health of any economy over a period of time can be roughly assessed with the help of the values of the indicators like GDP or GDP growth. However, these indicators, being purely numerical in nature, do not take into account the other ordinal aspects of well being of the residents of the country. Often the GDP of a country shows high trends in several countries where the welfare indicators like health and education shows not so impressive performances and vice versa. Therefore, to see whether the Japanese economy actually suffered in the period of what is known as the Lost Decade in the economic history of the county, it is necessary to take into consideration the performance management of the country in other welfare indices during that period of time.

In general, the overall well being of the residents of the country can be seen from the performance of the country in the indicators like life expectancy. The life expectancy of the country during the concerned period can be seen from the following figure:

As can be seen from the above figure, it can be seen that the life expectancy of the country consistently maintained a moderately increasing trend over the years between 1960 and 2015. This in its turn indicates that the overall health conditions of the people of Japan has been continually increasing much of which can be attributed to the good quality diet habits of the people during this time (Liu et al. 2013).

The above figure shows that the unemployment rate in the country was really low during the period of 1980 to 1995 which rose after that. However, the reason for this rise can be the effects of the stock market crash and an ensuing recession or the reason may be something else (Kakinaka and Miyamoto 2012).

Conclusion

From the above discussion, it can be concluded that there was significant impact of the Lost Decade on the financial market of the country. However, as can be seen from the data regarding the economic and other social welfare indicators, it can be said that the overall well being of the people of the country was not compromised to that extent as many economists portray it across the world. Thus, the theories asserting the failure of the economy in the Lost Decade can be a bit overestimated and generalized, as the overall performance of the economy of Japan was not as unimpressive as it is usually portrayed in general framework.

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