When was japan lost decade

However by Japan had entered an economic and social crisis known as the Lost Decade. The Lost decade was a 10 year economic stagnation that led to economic and social instability. There is much speculation surrounding the reasons for the economic bubble burst, but the two main factors that are most commonly spoken of are:. Post war Japan prior to relied on a well- managed transition of individuals from school to work that saw individuals and companies forming symbiotic relationships to which a worker typically male would commit themselves, and most of their time, to their company from the start of employment until their retirement.

This process began to become problematic moving into the 90s as companies could not afford to take on new workers leaving a great deal of young Japanese individuals lost and without any direction or motivation in life. For example, the dot-com bust and the Great Recession in the United States immediately followed several record U. Similarly, Japan's lost decade was largely caused by speculation during a boom cycle. Record-low interest rates fueled stock market and real estate speculation that sent valuations soaring throughout the s.

Upon realizing that the bubble was unsustainable, the Bank of Japan raised interest rates to try and stem the speculation. The move quickly led to a stock market crash and debt crisis, as borrowers failed to make payments on many debts that were backed by speculative assets.

Finally, the issues manifested themselves in a banking crisis that led to consolidation and several government bailouts. After the initial economic shock, Japan's economy was sent into its now-infamous lost decade, where economic expansion halted for more than ten years. The country experienced low growth and deflation during this time, while the Japanese stock markets hovered near record lows.

The property market never fully returned to its pre-boom levels. Economist Paul Krugman blames the lost decade on consumers and companies that saved too much and caused the economy to slow.

Other economists point blame at the country's aging population demographic or its monetary policy — or both — for the decline. In particular, the slow response of the Bank of Japan BOJ to intervene in the marketplace may have exacerbated the problem.

The reality is that many of these factors may have contributed to the lost decade. Following the crisis, many Japanese citizens responded by saving more and spending less, which had a negative impact on aggregate demand. This contributed to deflationary pressures that encouraged consumers to further hoard money, which resulted in a deflationary spiral.

Many economists and financial experts have compared Japan's lost decade to the U. In both cases, speculation fueled real estate and stock market bubbles that eventually crashed and led to government bailouts.

Both economies also responded by promising to increase fiscal spending to combat deflation. The period between and in the U. Despite the similarities, there are also some important differences between the two situations. This is known as the monetization of debt. It should be noted that open-market operations are also used to attain and maintain target interest rates, but when a central bank monetizes the debt, it does so without regard for a target interest rate.

In , the Bank of Japan began to target the money supply instead of interest rates, which helped moderate deflation and stimulate economic growth. However, when a central bank injects money into the financial system , banks are left with more money on hand but also must be willing to lend that money out. This brings us to the next problem Japan faced: a credit crunch.

A credit crunch is an economic scenario in which banks have tightened lending requirements and, for the most part, do not lend. Financial institutions may not lend for a few reasons, including:.

Calculated risk-taking and lending represent the life-blood of a free market economy. When capital is put to work, jobs are created, spending increases, efficiencies are discovered, leading to higher productivity and economic growth. On the other hand, when banks are reluctant to lend, it is difficult for the economy to grow. In the same manner that a liquidity trap leads to deflation, a credit crunch is also conducive to deflation as banks are unwilling to lend.

Therefore, consumers and businesses are unable to spend, causing prices to fall. Similar to a liquidity trap, which leads to deflation, a credit crunch is also conducive to deflation as banks are unwilling to lend. Less lending means there's less new money being injected into the economy. As a result, consumers and businesses are unable to borrow and spend, despite low interest rates, causing prices to fall further.

Below are a few possible solutions to a credit crunch. As Japan suffered from a credit crunch in the s, Japanese banks were slow to take losses.

Even though public funds were made available to banks to restructure their balance sheets, they failed to do so because of the fear of the stigma associated with revealing long-concealed losses and the fear of losing control to foreign investors.

Typically, bank losses need to be recognized to get out of a credit crunch, while the banking system needs to be transparent. Also, banks must have confidence in their ability to assess and manage risk. Deflation causes many problems because when asset prices fall, households and investors hoard cash since their cash will be worth more tomorrow than it is today.

The result can lead to a liquidity trap. When asset prices fall, the value of collateral backing loans falls, leading to bank losses. When banks suffer losses, they cut lending, which can create a credit crunch. Typically, inflation can be an economic problem, leading to rising prices and lowering the purchasing power of consumers. However, re-inflating the economy might be necessary for Japan to avoid prolonged periods of slow growth, as in the case of the s.

Steady and moderate inflation might trigger consumers and businesses to spend versus hoarding cash as they would in a deflationary environment. Unfortunately, re-inflating an economy isn't easy, especially if banks are unwilling or unable to lend. Notable American economist Milton Friedman suggested that avoiding a liquidity trap can be achieved by bypassing financial intermediaries and giving money directly to individuals to spend.

This process is known as "helicopter money" because the theory is that a central bank could drop money from a helicopter. National Bureau of Economic Research. Accessed June 29, Institute for Monetary and Economic Studies. American Enterprise Institute. Federal Open Market Committee. Center for Economic Policy Research. Monetary Policy. Fiscal Policy. Federal Reserve. Your Privacy Rights. To change or withdraw your consent choices for Investopedia.

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