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Japan's Lost Decade — 1989 to 2006

Japan's Recession and Bank Rescue, 1998 to 1999

Explain what the 1998 recession cost Japan in output and jobs, and how the state supported the banks in 1998 and 1999 with public funds, new laws and new capital.

Before you start

What you'll be able to answer

  1. What did the 1998 recession cost Japan in output and jobs?
  2. How did the state use new laws and public funds to deal with failing banks in 1998?
  3. What did the state's new capital for the major banks in 1998 and 1999 do?

Where this sits

Japan's Lost Decade — 1989 to 2006 · this module is lit

  1. Dec 1989Share prices in Japan peak
  2. Aug 1990The Bank of Japan's last rise in its discount rate, the interest rate at which it lent to banks
  3. Aug 1992The government announces the first of six spending packages up to 1995
  4. 1995-96The first direct use of taxpayers' money against financial instability covers losses at failed housing-loan companies, the jusen
  5. 1 Apr 1997The consumption tax rate, a tax on what people buy, is raised
  6. Nov 1997Sanyo Securities, Hokkaido Takushoku Bank and Yamaichi Securities fail
  7. Oct-Dec 1998Japan's parliament, the Diet, makes more public money available to deal with banks' bad loans, and the state takes over the Long-Term Credit Bank and Nippon Credit Bank
  8. Feb 1999The Bank of Japan begins its zero interest rate policy, pushing its overnight rate as low as possible
  9. Mar 1999Public capital, new capital paid for by the state, is put into the major banks
  10. Mar 2001The Bank of Japan begins quantitative easing, a target for the money banks keep in their accounts with it
  11. Oct 2002The Financial Services Agency, the banking regulator, launches its programme to cut bad loans
  12. Mar 2006The Bank of Japan ends quantitative easing

Japan in the summer of 1998

In June 1998 a new regulator, the Financial Supervisory Agency, took over bank supervision from the Ministry of Finance. That same month trouble surfaced at the Long-Term Credit Bank of Japan (LTCB). Seven months earlier Hokkaido Takushoku Bank and Yamaichi Securities had failed. Yamaichi was a large securities house, a firm trading shares and bonds for clients. Output, the value of everything the economy produced, had fallen in late 1997 and early 1998, the International Monetary Fund (IMF) reported, and business investment, firms' spending on equipment and buildings, was faltering.

Predict first

Output fell through 1998. What do you expect happened to unemployment over the four years that followed?

Japan's economy shrank in 1998

In 1998 Japan's output shrank by 1.8 per cent, on World Bank figures published in 2026.

The fall reached most of the economy. Household spending, house-building and business investment all fell further and for longer than in earlier recessions, the IMF said in 1999. Falling incomes held back household spending. Limits on bank lending also seem to have held back business investment, the IMF said, alongside firms' efforts to cut debts left from the bubble years.

These falls fed on each other. When households spend less, firms sell less. Firms that sell less invest less and hire fewer people, and people out of work spend less again.

Unemployment hit what the IMF called a post-war record, and kept rising until 2002

In June 1998 unemployment, the share of people who want work but have none, reached 4.3 per cent, a post-war record, the IMF reported.

The chart shows the World Bank's yearly figures, which cover the whole year: 4.1 per cent for 1998. Output grew again in 2000, yet unemployment did not fall back. The yearly rate went on rising and reached 5.4 per cent in 2002. Large firms planned further cuts: in 1999 several announced plans to reduce their workforce, the IMF noted.

Unemployment in Japan, 1991 to 2006Per cent of the labour force, yearly average
024619911993199519971999200120032005Recession, 1998Highest, 2002

Source: World Bank, World Development Indicators (SL.UEM.TOTL.ZS), data last updated 13 July 2026. CC BY 4.0.