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Japan's Lost Decade — 1989 to 2006

Why Japan's Slump Lasted So Long

Explain the main views on why Japan's slump lasted so long, who holds each, and why the question is still argued over.

Before you start

What you'll be able to answer

  1. What did the Cabinet Office and Bank of Japan economists say was holding Japan's economy back?
  2. Why do some blame the policymakers, and what did Federal Reserve staff say should have been done?
  3. Why do some blame the slow handling of the bad loans, and why is the argument not settled?

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

In December 2001 Japan's economy had turned down again

In December 2001 the Cabinet Office, the Japanese government department that reports each year on the economy, published its annual report. Its subtitle was "Without reforms, no gains". A recovery that began in the spring of 1999 had been short, and the economy had turned down again. Share and land prices had soared in the late 1980s, a boom known as the bubble, then fallen for years after 1990, and the economy was still weak. The report set out to explain why the recovery had not lasted.

Take a guess

What do you think the Cabinet Office named in 2001 as a burden on Japan's economy?

The Cabinet Office said excess debts and bad loans held the economy back

Firms were weighed down by excessive debts and banks by large bad loans, loans that were not being repaid, the Cabinet Office said in its 2001 report, and both were a burden on the economy. It gave three ways the bad loans dragged on growth. Losses on them ate into banks' profits, so banks lent less. Workers and machines stayed tied up in firms and industries that earned little. And firms and households grew cautious as their confidence in the banks fell.

The excess debts did harm of their own, the report said: firms paying down what they owed cut back on investment in new equipment and buildings.

Bank of Japan economists saw years of working off the excesses of the bubble

Growth averaged only about 1 per cent a year from 1992 to 2002, six economists at the Bank of Japan, Japan's central bank, noted in a 2005 paper giving their own view, not the Bank's. The chart shows yearly growth in GDP, the value of all the economy produces.

In the late 1980s and early 1990s, they wrote, firms had built up too much equipment, too many staff and too much debt, and the basic force behind the slump was probably the need to work off those excesses. On this view, a firm with spare factories and heavy debts invests little until it has used the spare room and paid its debts down. When many firms do that at once, spending stays weak. Falling share and land prices added to it. Falling prices in the shops were, in their view, a sign of these problems, not the root cause.

How fast Japan's economy grew, 1985 to 2006Real GDP growth, per cent a year; below zero means the economy shrank
-20246819851988199119941997200020032006Slow growth sets in

Source: World Bank, World Development Indicators (NY.GDP.MKTP.KD.ZG), data last updated 13 July 2026. CC BY 4.0.