Academic journal article Business Economics

The Economics of Japan's Stagnation

Academic journal article Business Economics

The Economics of Japan's Stagnation

Article excerpt

The Japanese economy has been mired in subdued growth and deflation for more than two decades. This paper describes the key economic facts and features of Japan's decades of stagnation. It discusses why longterm Japanese government bonds' nominal yields have stayed very low in spite of elevated government debt ratios and chronic fiscal deficits. It also provides a brief overview of Abenomics and recent economic developments in Japan.

Business Economics (2014) 49, 156-175. doi:10.1057/be.2014.19

Keywords: Japan's lost decades, stagnation, deflation, Abenomics

Though Japan was hit especially hard during the global recession in 2008, its current malaise can be traced back to the 1980s, when real and financial asset prices started to rise sharply, and to the 1990s, when bubbles in its housing and equity markets collapsed. Many prominent economists have studied Japan's stagnation and have argued about its causes and the appropriate policy responses, and this debate remains unsettled. (1)

In spite of more than 20 years of slow growth, Japan remains (as of 2014) the world's third largest economy--measured in either current dollar, real, or purchasing parity terms--after the United States and the People's Republic of China. Although the quality of life in Japan is high, the country's slow growth, declining population in which the share of those 65 years of age and over is growing, lack of job growth, and low female labor force participation pose economic challenges going forward. A sluggish Japan affects not only its own citizens but also the rest of the world, particularly emerging Asia (including China), given the multifaceted economic and financial ties that bind countries in this region. Moreover, a better understanding of Japan's plight may provide some insight into the countries currently facing problems of economic stagnation that are eerily similar to those that have been bedeviling Japan for many years.

This article addresses four questions:

* What are the economic facts and features of Japan's decades of stagnation?

* Why have long-term Japanese government bonds' nominal yields stayed very low in spite of elevated government debt ratios and chronic fiscal deficits?

* What are the consequences of elevated Japanese government debt?

* What have been the economic implications of "Abenomics"?

Section 1 examines the key economic facts and features of Japan's stagnation. Section 2 explains why long-term Japanese government bonds' nominal yields have stayed low in spite of elevated government debt ratios and chronic fiscal deficits. Section 3 provides a brief overview of "Abenomics." Section 4 summarizes recent economic developments in Japan. Section 5 concludes that given its history of comebacks, Japan can overcome its current economic stagnation, spurred by appropriate fiscal, monetary, and other economic policies. A revitalized Japan can contribute meaningfully to regional and global economic growth.

1. Facts and Features of the Lost Decades

The slowdown in growth, and Japan's diminishing global role

Japan's economy has stagnated for more than two decades following the collapse of the real estate bubble (see Figure 1) and equity bubble in the early 1990s. (2) The value of land and equity markets had risen sharply in the period prior to the crash, particularly during the 1980s, as Japan's banks lent without much regard for the quality of the collateral or the ability of the borrowers to generate sufficient income to service the debt. While these lending dynamics raised equity and real estate prices, booms in asset prices and increased leverage fueled consumption, mal- and over-investment, and growth. Asset bubbles played a role in the appreciation of the yen by attracting foreign portfolio investment. As the Bank of Japan (BOJ) started raising interest rates in the early 1990s, the elevated equity and real estate prices proved to be unsustainable, and eventually the bubbles burst. …

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