Lost Decade


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 that has become one of the oldest economic crises in history.

Key points to remember

  • The lost decade refers to a long period of slowdown, lasting almost ten years, in the Japanese economy during the 1990s.
  • Misguided government policies after a housing bubble are seen as the main culprits of the lost decade.
  • In the American economy, the first decade of the 21st century, marked by two stock market crashes, is often compared to the lost decade of Japan.

Understanding the lost decade

The Lost Decade is a term originally coined to refer to the decade-long economic crisis in Japan during the 1990s. Japan’s economy grew dramatically after World War II, culminating in the 1980s with GNP the highest per capita in the world. This increase led to an increase in speculation and a surge in stock market and real estate valuations.

In the early 1990s, when it became clear that the bubble was about to burst, the Japanese Ministry of Finance raised interest rates, and eventually the stock market collapsed and a crisis in debt started, stopping economic growth and leading to what is now called the lost decade. .

Analysts continue to debate the magnitude of the economic impact of the lost decade, but they agree that it was irrefutable. Over the past decade, Japan’s gross domestic product (GDP) has averaged 1.2%, significantly lower than that of other G-7 countries. Household savings have increased. But this increase did not translate into demand, leading to deflation for the economy. In many cases, property values ​​have still not recovered and Japanese markets continued to stagnate during the first decade of the 21stst century. As a result, many refer to the period between 1991 and 2020 as the lost score or the 20 years lost.

The pain should continue for Japan. According to a study by the St. Louis Fed, current growth rates imply that Japan’s GDP will double in 80 years, whereas before it doubled every 14 years.

What caused the lost decade?

Although there is agreement on the events that precipitated the lost decade, the causes of Japan’s economic difficulties are still under debate. The researchers produced documents describing the possible reasons for which the Japanese economy turned into deflation. Paul Krugman said that Japan was caught in a liquidity trap: consumers were keeping their savings because they feared the economy would get worse. As a result, demand remained significantly weak and the production capacity of the economy as a whole also declined. A number of factors, mainly structural, have contributed to the decline of the economy. For example, the aging of Japan’s population means that its productivity figures have declined over the years.

Other research on the subject analyzes the role played by the decrease in household wealth in the economic crisis. A collapse in land and equity prices has reduced overall household wealth and available disposable income to stimulate demand. As a result, the economy has stagnated.

A 2020 research paper attributes the “vertical investment economy” curve to Japan’s problems. Population aging coupled with a slowdown in the country’s innovation ecosystem due to misguided government policies have hampered economic growth. For example, stringent requirements imposed on Japanese banks to comply with Basel requirements, which set capital reserve ratios for banking operations, have prevented them from lending to startups or small businesses that drive the process. innovation.

The lost decade in the United States

Although the term Lost Decade originated to describe Japan’s lasting economic slowdown, the term was also applied to the first decade of the 21stst century in the United States, which was turned upside down by two huge recessions caused by the bursting of the Internet bubble in 2000 and the housing bubble in 2008.

The period between 2000 and 2009 saw a massive erosion of wealth in the US economy and the slowest period of economic growth in the United States in decades. The S&P 500 had its worst decade ever during this period, with a total dividend yield of -9.1%, an overall performance lower than that of the Great Depression of the 1930s.

In addition, net employment growth hovered around zero during this period. Long-term unemployment figures have reached record levels and the United States has lost more than 33% of its manufacturing jobs.

The US economy started to rebound in 2020, thanks in large part to financial stimulus measures supported by the Federal Reserve and the Obama administration. In the second quarter of 2020, the U.S. economy recorded a record $ 74.8 trillion in household net worth, which helped the stock market soar and house prices rebounded. At the end of 2020, the Dow Jones and the S&P 500 also reached new heights.

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