Bubbles in History & Japan's Lost Decade
Bubbles in History – Japan’s Lost Decade
We continue our study of asset & investment bubbles in history with Japan’s ‘Lost Decade’. The term ‘Lost Decade’ is commonly used to describe a period of economic stagnation in Japan during the 1990s.
Japan’s post-World War II economic rise was meteoric, with its Gross National Product (GNP) only exceeded by the United States in the 1970s; and by the late 1980s Japan ranked first in GNP per capita worldwide. The Japanese stock market also benefitted from this economic growth right up to its 1990s high (image 1).
However, the record low interest rates that in part fuelled this equity market growth (and a similar growth in real estate prices) was not to last. The Bank of Japan (BoJ) belatedly identified that a bubble was forming and raised interest rates to stem investor speculation. This led to a stock market and debt crisis as borrowers failed to make payments on debts that were backed by speculative assets that had fallen in value significantly. Following the 1990s high, equity markets have traded sideways with a number of false dawns giving investors forlorn hope (image 2).
During the Lost Decade, Japanese consumers and businesses increased their savings as they feared economic declines, which reduced aggregate demand further leading to periods of deflation. This led to consumers and business to again increase their savings leading to a deflationary spiral.
