Japan's Lost Decade, 1990 to 2006

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Where this sits

In December 1989 share prices in Japan reached their peak

In the late 1980s share and land prices in Japan rose fast, a rise later known as a bubble, and banks lent freely against land. Share prices peaked in December 1989 and land prices soon after. Over the next sixteen years share and land prices fell for long stretches, banks failed, and the government and the Bank of Japan, the central bank, tried one remedy after another. How prices rose is told in the series Japan's Asset Bubble. This series starts with the fall.

Falling land and share prices left the banks with bad loans

A large part of Japan's bank lending was secured on land, a 2001 Bank for International Settlements (BIS) paper notes. Banks also relied on the shares they held for part of their capital, the cushion that absorbs a bank's losses.

Share prices fell to their lowest point before 2006 in April 2003, more than thirteen years after the peak. Land for shops and offices in the six major cities fell from its September 1990 peak through the 1990s, on a Japan Real Estate Institute index. As land fell, many borrowers stopped repaying, and the land behind their loans was no longer worth what they owed. Loans not being repaid as agreed are called bad loans. In 1995 and 1996 taxpayers' money was used directly against financial instability for the first time, to cover losses at failed housing-loan companies, the jusen. It met strong public resentment, the BIS paper records.

The Bank of Japan cut its rate and the government announced spending packages

As the economy slowed, the Bank of Japan cut its discount rate, the interest rate at which it lent to banks. It had kept raising the rate until August 1990, when it reached 6 per cent, then from July 1991 cut it step by step to 0.5 per cent by September 1995.

Between August 1992 and September 1995 the government announced six spending packages to support the economy, mostly public works with some tax cuts, each announced as a single headline total. Stimulus packages like these widened the budget deficit, even allowing for the weak economy, the IMF said in 1999. General government gross debt, the total owed by central and local government and the social security funds, began to climb.

Growth stayed weak through the 1990s

The chart shows the yearly growth of Japan's GDP, the value of everything the economy produces, leaving out price rises. After the bubble burst, growth averaged about 1 per cent a year, on the figures of the IMF and of Bank of Japan economists.

On 1 April 1997 the government raised the consumption tax, a tax on what people buy, from 3 per cent to 5 per cent. The budget was tightened to make the public finances sustainable ahead of what the IMF called demographic pressures, meaning a population growing older. The IMF traced the downturn that followed to a fall in household spending after the tax rise, worries about the banks, the tighter budget and the Asian financial crisis. Little published statistical work settles whether the tax rise caused the downturn that began in 1997, a 2019 brief from the Federal Reserve Bank of Richmond notes.

Large firms failed in November 1997, and the state put public money into the banks

By 1997 the banks' capital had thinned as share prices fell. In November 1997 two securities houses, firms that trade shares and bonds for clients, Sanyo Securities and Yamaichi Securities, and Hokkaido Takushoku Bank failed within weeks. Hokkaido Takushoku was the first city bank, a large commercial bank, to close during the crisis, the Federal Reserve Bank of San Francisco noted. The extra interest Japanese banks paid to borrow abroad, the Japan premium, rose sharply. The economy shrank in 1998, and that June unemployment reached what the IMF called a post-war record.

In October 1998 the Diet, Japan's parliament, made ¥60 trillion of public money available to deal with banks' bad loans, double the ¥30 trillion before. That month the state took into public ownership the failing Long-Term Credit Bank, and in December the failing Nippon Credit Bank. In March 1999 it put public capital into 15 major banks.

Prices fell, and the Bank of Japan took its rate to zero and then targeted bank reserves

From the late 1990s Japan had deflation, a fall in prices across the whole economy: in every year from 1999 to 2005 consumer prices fell or held flat, and the GDP deflator, which measures those prices, fell by more.

In February 1999 the Bank of Japan began what it calls the world's first zero interest rate policy, pushing its overnight rate as low as possible. Two months later it promised to keep the rate there until the fear of falling prices had passed. In August 2000 it judged that point reached and ended that policy. In March 2001 it began quantitative easing: it targeted the money banks kept in their accounts with it, and raised it several times. This was meant to bring interest rates down further, the Bank said. It would keep quantitative easing until consumer prices, leaving out fresh food, were steadily no lower than a year before.

The bad loans were cut, and growth returned

In October 2002 the Financial Services Agency (FSA), the banking regulator, set a target: to cut the major banks' bad-loan ratio, their bad loans as a share of their lending, to about half its March 2002 level by March 2005. It pushed the banks to value their loans more strictly and to strengthen their capital. In May 2005 the FSA said the goal had been achieved.

Growth picked up from 2003, share prices rose from their April 2003 low, and unemployment fell from its 2002 peak. In March 2006 the Bank of Japan ended quantitative easing and went back to targeting its overnight rate, kept at effectively zero. General government gross debt had climbed: from 55 per cent of GDP in 1990, it had nearly trebled as a share of GDP by 2005, on IMF figures published in 2026.

"Lost decade" is a label, and why the slump lasted so long is still argued

Critics blamed policymakers for what they called "the lost decade", the 2001 BIS paper records. Bank of Japan economists writing in 2005 describe 1992 to 2002 as "a period that has been called a lost decade". It is a label.

Why the slump lasted so long is still argued. The basic force, the Bank's economists suggested, seems to have been working off the excess equipment, staff and debt piled up around 1990. Judged by what followed, interest rates should have come down faster, US Federal Reserve Board staff concluded in 2002. Thin provisions and poor disclosure delayed recognition of how large the bad loans were, the BIS paper says, and banks kept lending to firms with little hope of recovery, a view the Bank of Japan economists note. The next module looks at how loans backed by land went bad.

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