Team Essay 1

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Japan’s Lost Decades

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Japan’s Lost Decades (失われた10年, Ushinawareta Jūnen) refers to a problem that began in the 1990s and has persisted to the current era. Japan’s GDP growth rate between 2000 and 2010 was 1%, and debt continued to rise due to crises such as 2008’s Great Recession, multiple natural disasters and the COVID-19 pandemic. 

Causes of the “Lost Decade”

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There are many theories from many economists on what caused Japan’s Lost Decades, with them including ideas of rapid deflation, credit crunch, the liquidity trap and the country's ageing population. 

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• Deflation is a sustained decrease in the price levels of goods and services in an economy.

• Credit Crunch refers to the unwillingness of financial institutions such as banks on lending money.

• The liquidity trap is when people hold on to their money instead of spending it due to very low interest rates to prevent the money from getting devalued from the rapid deflation rate (in Japan’s case, 0.1%). 

• As Japan has an ageing population, consumer spending confidence lowers, and saving increases, again leading to the slowing down of economic growth.

 

Effect on Japan

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The Lost Decades affected multiple areas of the economy, such as GDP, wages and consumer prices. Over the period of 1995 to 2007 the GDP of Japan fell from $5.33 trillion to $4.36 trillion. Wages fell whilst interest rates remained low at -0.10%. The Covid 19 pandemic didn’t help either, Japan’s deflation grew and whilst its economy didn’t, contracting the country’s GDP by 7.9% during the summer alone. Consumer prices fell by 0.9 % and continued to fall during 2021 until now. 

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Policies that the Japanese government tried to implement

To rejuvenate the Japanese economy, the government implemented various strategies. Initially, they reduced interest rates, but this failed to stimulate consumers and businesses. They then attempted to use quantitative easing, where the central bank increased the money supply by repurchasing government and corporate bonds from financial institutions. Although this injected more cash into commercial banks, encouraging them to offer cheaper loans, the banks in Japan were hesitant to lend, leading to a credit crunch. This reluctance to lend, akin to a liquidity trap, resulted in deflation as consumers and businesses struggled to secure funds for spending and investment. All in all, it backfired horribly and caused the economy to sink even lower.

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Solutions to the Lost Decade

During Japan’s lost decades, one of the issues during the era was a lack of transparency and accountability in corporate governance. To solve this problem, Japan’s government introduced a Corporate Governance Code which was “a structure for transparent, fair, timely and decisive decision-making by companies”, aimed to improve transparency, accountability, and the overall governance of corporations. The improvement aimed to increase investor confidence, attract more foreign investment, and stimulate economic growth. It included measures such as appointing independent directors, enhancing shareholder rights, and ensuring proper disclosure of financial information. 

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Moreover, Japan faced issues related to inefficient allocation of capital and a reluctance among companies to invest in new ventures. Aiming to increase capital efficiency and stimulate economic growth, the Japanese government implemented measures to encourage companies to use their capital more efficiently involving shareholder activism, mergers and acquisitions, and providing incentives for research and development. 

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Finally, in order to tackle the ageing population and a declining workforce, Japan has implemented policies to increase the participation of women and elderly individuals in the workforce. They have done this by promoting work-life balance, providing childcare support, and removing barriers to employment for older individuals and by doing so, Japan was able to mitigate the impact of a shrinking workforce, potentially boosting productivity and economic output.

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Important takeaways include:

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• Central Banks must act quickly: The rate of the reaction from the Bank of Japan allowed for problems to be exaggerated and resulted in years of low and slow economic growth.

• Lowering interest rates is not always the answer: When consumer and business confidence is low, lowering interest rates has no effect on spending. The Central banks should’ve used monetary and fiscal policies to encourage and boost economic activity.

• Negative interest rates aren’t easy to quit: The Bank of Japan dropped interest rates below 0 to stop them from spiralling further into deflation. However, Japan’s inability to increase these rates means they are to continue with such rates below.

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Written collaboratively by the BPS Economics Club

Sources:
https://www.studysmarter.co.uk/explanations/macroeconomics/macroeconomics-examples/japan-lost-decades/ 

https://en.wikipedia.org/wiki/Lost_Decades 

https://www.jpx.co.jp/english/news/1020/b5b4pj0000046kxj-att/b5b4pj0000046l0c.pdf