The economic stagnation in Japan in the 90s

Term Paper 2005 10 Pages

Business economics - Economic Policy


1. Introduction

This report will examine the economic stagnation in Japan in the 1990s. The second section will introduce the events in the 1990s and give the most important features, followed by a closer look at the chain of events, explaining what caused what in a chronological approach. From there, we will introduce a set of possible reasons for the depicted developments and the theoretical frameworks in the third and fourth section which will then lead to our conclusion based on the analysis given before, accommodating the conclusion of Krugman of Japan being in a liquidity trap in our findings.

2. Japan in the 90s – summarizing macroeconomic developments

This section will introduce the phases considered, the building the “bubble” in the 80s, “burst” of the bubble in February 1991, continuous recession and seeming recovery in 1996 and renewed economic downturn from 1997 on until 2000, the end of the considered timeframe.

a. Build-up of booming asset and real estate market – “bubble economy”

Japans Economy in the 80s showed strong growth of above average, e.g. 4.1% ten year average growth in 1986 (Weinert, 2001, p. 461) and very low inflation (Baig, 2003, p. 5). Declining regulation of the financial sector and generally lax regulation led to a credit-fuelled boom in the land- and asset-markets (Schrooten, 2000, p. 2).

Within this process, the boom-financing bank-loans were built on collaterals of mostly land or stocks, accumulating risks in the loan books of the banks (Woo, 1999, p.7).

b. “Burst” of the bubble

By 1989, the Japanese stock market peaked, in 1992, land prices start to decline. Both are related to government intervention, the stock market was affected by a change of the discount rate by the Bank of Japan (BoJ) and the latter was influenced by a restriction of maximum loans to real estate in April 1990 (Baig, 2003, p. 8). The economic downturn in the aftermath was worsened by interconnection of bank loans and declining value of collaterals.

c. Economic down-turn and weak recovery until the “Big Bang” in 1997

By 1992, Japanese banks had to cope with increased financing cost (Baig, 2003, p. 8), at the same time, lending to the real estate sector increased through “jusen” companies, security and insurance companies engaged in home lending, further accumulating potentially bad loans leading to the collapse of several “jusen” companies in 1996 (Baig, 2003, p. 24) and the first bankruptcy of a financial company. Overall, the financial sector and its condition were in steady decline until 1997.

Especially in 1994 and 1995, the economy contracted strongly, the original expectations of a merely cyclical downturn were rejected (Schrooten, 2000, p.3)

By 1995, the average 10 year growth had declined from 4.1% in 1985 to 1.4%, even including the last years of strong growth before the burst of the bubble and the GDP actually contracting in 1995 by ca. 0.5% (Weinert, 2001, pp. 461; 464).

d. “Big Bang” in 1997

By this year, the economic crisis had shown several aspects. The financial sector was still in crisis, despite cooperation, favourable accounting and provision rules regarding non-performing loans (NPL) and tapping of unrealized profits in balances (Baig, 2003, pp. 25 – 28). Simultaneously, Japanese GDP grew in 1996 and 1997 considerably which lead the authorities to conclude the economic down-turn had ended and to tighten fiscal policy too early (Weinert, 2001, p. 471). With the Asia Crisis worsening financial problems, three big banks actually suffered bankruptcy (Schrooten, 2000, p. 2).

By 1997, regulation attempts to finally clean up the financial sector were undertaken, including a self-assessment process and new classifications of capital in the banks` balance sheets. With the new law, problems turned transparent and enforced a massive intervention of the state with money injections to save the financial sector worth significant shares of GDP (Baig, 2003, p. 31).

Still suffering from the malfunctioning financial sector, economic output grew significantly, the fiscal situation continuously deteriorated (Weinert, 2001, p. 464), while a zero-interest policy was officially introduced by the government in 1999 to foster growth and initiate economic growth (Schrooten, 2000, p. 3). The fiscal tightening in 1997, including the introduction of a new tax was strongly overambitious (IMF, 1998, p. 115).



ISBN (eBook)
File size
458 KB
Catalog Number
Institution / College
University of Hertfordshire – Business School
Japan Economic Policy

Title: The economic stagnation in Japan in the 90s