Japan: A Dormant Economy?

By Atiyah Krishnan

Japan, the land of the rising sun, is a country living in the future. They have made some remarkable innovations like the world’s first high-speed bullet train, QR codes, CD players, PlayStation and now even hotels with humanoid robot staff. 

This era of rapid growth and development started in the 1960s. The heavy industries incorporated cutting-edge factory automation and technology, rendering high-quality products for exports. Electronic items from Sony and Toyota cars are one of the leading firms in their respective fields. 

By 1995, Japan’s GDP had surpassed 5 trillion dollars. At that rate, it could’ve become the leading country in per capita GDP. However, Japan’s per capita GDP (or economic output per person) has remained at the same level ever since. Despite possessing all requisites to fuel the nation’s growth, Japan has spent the last 27 years in economic stagnation. This period, marked by low growth, low inflation and low interest rates, is termed as Secular stagnation.

Japan rose to the position of a developed nation within a period of 50 years after World War II and their currency, the Japanese Yen, became stronger as well. They had to export goods to countries like the U.S at higher rates to maintain profits. This led to losses in exports, which was one of the key components of the country’s growth. In order to cover for these losses, Japan sought to accelerate consumption in the domestic market. They reduced interest rates to increase people’s purchasing power. It marked the beginning of a bubble. People continued purchasing assets, pushing prices higher, until the bubble burst in 1991, with the crash of the stock market. 

The following decade of economic slump (1991-2001) came to be known as the ‘Lost Decade’. This title because the whole decade was marked by a near flat lining of stock prices. Banks sanctioned huge loans by keeping land as collateral. However, with land prices spiralling, banks suffered huge losses. People had lost hope in financial institutions and preferred keeping their money in cash at home. This liquidity trap aggravated the cold economic situation. Some economists hold the view that one of the reasons for this crash was the general overconfidence of the public after their unprecedented development. They were unable to foresee their downfall. According to a report by the IMF, the real GDP growth of the ‘Lost Decade’ averaged 1 percent, way lower than the 4 percent average of the preceding decade.

Source: World Bank

The Japanese government has implemented several measures since the early 90s to revive the economy. They adopted the expansionary monetary policy of Quantitative Easing wherein the Bank of Japan purchased securities on the open market in order to increase money supply in the system. This did not help in any way. In 2016, The Bank of Japan announced negative interest rates as a last resort to encourage borrowings and investment, but that didn’t prove to be fruitful either. Negative interest rates may provide some incentive to people but it cannot train the workforce or create reliable businesses that people may want to invest in.  Thus, the stagnation continued and this ‘Lost Decade’ phenomenon has turned into nearly 3 lost decades now. 

The population implosion is one of the reasons why Japan is unable to come out of the slump. The median age in Japan is 48.6. There is a shrinkage in the workforce while the retired population is increasing. A fall in the productive population of the country puts strain on the social security system. There is a shortage of funds for the social security system that the government has to cover from its fiscal budget.

Contributing to this issue are low birth rates. The average age of marriage is increasing, expenses of childcare are high and this is because the average living standard of a Japanese worker has fallen since 1995, due to the GDP stagnation. The youth is stuck in the race of earning higher wages. In such a competitive environment, women delay childbirth as maternity leave reduces their chances of getting promoted. Therefore, stunted growth has led to a vicious cycle. A supposed solution to this problem could be letting young immigrants into the country but Japan’s strict immigration laws make it impossible to do so. Supply chain bottlenecks, cheaper labour costs of other countries and unresolved political issues in Japan are other reasons why the country is struggling to break this cycle of stagnation.

This phenomenon is interesting because Japan is still the world’s third-largest economy. Japanese products remain a marker of quality and durability. Japan has successfully created an image of a futuristic nation that many people aspire to live in while eluding its real nature and shortcomings. At one point “Japanification” was used as a positive term. Japanification of a country meant rapid growth and development. However, this has turned around since the Lost Decade and Japanification now stands for a condition of the country where there is no real growth. 


Japan’s Liquidity Trap | Levy Economics Institute. (n.d.). Levy Economics Institute. Retrieved August 19, 2022, from https://www.levyinstitute.org/publications/japans-liquidity-trap

Reinterpreting the Japanese Economic Miracle. (2014, August 1). Harvard Business Review. Retrieved August 18, 2022, from https://hbr.org/1998/01/reinterpreting-the-japanese-economic-miracle

Bell, M. (2022, January 8). Japan’s Self-Destructive Immigration Policy. The Diplomat. Retrieved August 18, 2022, from https://thediplomat.com/2022/01/japans-self-destructive-immigration-policy/

Japan’s Lost Decade — Policies for Economic Revival. (n.d.). International Monetary Fund. Retrieved August 23, 2022, from https://www.imf.org/external/pubs/nft/2003/japan/index.htm


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