What Is the Lost Decade?

The Lost Decade is commonly used to describe the decade of the 1990s in Japan, a period of economic stagnation which became one of the longest-running economic crises in recorded history. Later decades are also included in some definitions, with the period from 1991-2011 (or even 1991-2021) sometimes also referred to as Japan's Lost Decades.

Understanding the Lost Decade

The Lost Decade is a term initially coined to refer to the decade-long economic crisis in Japan during the 1990s. Japan’s economy rose meteorically in the decades following World War II, peaking in the 1980s with the largest per capita gross national product (GNP) in the world. Japan's export-led growth during this period attracted capital and helped drive a trade surplus with the U.S.

To help offset global trade imbalances, Japan joined other major world economies in the Plaza Agreement in 1985. In accord with this agreement, Japan embarked on a period of loose monetary policy in the late 1980s. This loose monetary policy led to increased speculation and a soaring stock market and real estate valuations.

In the early 1990s, as it became apparent that the bubble was about to burst, the Japanese Financial Ministry raised interest rates, and ultimately the stock market crashed and a debt crisis began, halting economic growth and leading to what is now known as the Lost Decade. During the 1990s, Japan's gross domestic product (GDP) averaged 1.3%, significantly lower as compared to other G-7 countries. Household savings increased. But that increase did not translate into demand, resulting in deflation for the economy.

The Lost Decades

In the following decade, Japan's GDP growth averaged only 0.5% per year as sustained slow growth carried over right up until the global financial crisis and Great Recession. As a result, many refer to the period between 1991 and 2010 as the Lost Score, or the Lost 20 Years.

From 2011 to 2019, Japan's GDP grew an average of just under 1.0% per year, and 2020 marked the onset of a new global recession as governments locked down economic activity in reaction to the Covid-19 pandemic. Together the years from 1990 to the present are sometimes referred to as Japan's Lost Decades.

The pain is expected to continue for Japan. According to research from the Federal Reserve Bank of St. Louis, recent growth rates imply that Japan's GDP will double in 80 years when previously it doubled every 14 years.

What Caused The Lost Decade?

While there is some agreement on the events that led up to and precipitated the Lost Decade, the causes for Japan's sustained economic woes are still being debated. Once the bubble burst and the recession happened, why did it extend into an entire Lost Decade? (Or two? Or three?!) Demographic factors, such as Japan's aging population, and the geopolitical rise of China and other East Asian competitors may be underlying, non-economic factors. Researchers have produced papers delineating possible reasons why the Japanese economy sank into prolonged stagnation.

Keynesian economists have offered several demand-side explanations. Paul Krugman opined that Japan was caught in a liquidity trap: consumers were holding onto their savings because they feared that the economy was about to get worse. Other research on the subject analyzed the role played by decreasing household wealth in causing the economic crisis. Japan's Lost Decade, a 2017 book, blames a "vertical investment-saving" curve for Japan's problems.

Monetarist economists have instead pointed to Japan's monetary policy before and during the Lost Decade as too restrictive and not accommodative enough to restart growth. Milton Friedman wrote, in reference to Japan, that "the surest road to a healthy economic recovery is to increase the rate of monetary growth to shift from tight money to easier money, to a rate of monetary growth closer to that which prevailed in the golden 1980s but without again overdoing it. That would make much-needed financial and economic reforms far easier to achieve."

Despite these various attempts, Keynesian and Monetarist views on Japan's extended economic malaise generally fall short. Japan's government has engaged in repeated rounds of massive fiscal deficit spending (the Keynesian's solution to economic depression) and expansionary monetary policy (the Monetarist prescription) without notable success. This suggests that either the Keynesian and Monetarist explanations or solutions (or both) are likely mistaken.

Austrian economists have, on the contrary, argued that a period of extended economic stagnation is not inconsistent with Japan's economic policies that throughout the period acted to prop up existing firms and financial institutions rather than letting them fail and allowing entrepreneurs to reorganize them into new firms and industries. They point to the repeated economic and financial bailouts as a cause of (rather than a solution to) Japan's Lost Decade(s).