Andrea Ferrell, World
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Abenomics: Visiting the Past

By: Andrea Ferrell

Japan’s real estate bubble burst almost 30 years ago, so how is Shinzo Abe working to fix the still-present ramifications of the Lost Decade?

In 2012, Japan’s current prime minister, Shinzo Abe, created and implemented a new set of economic policies in an attempt to help revitalize the Japanese economy. The three parts to Abe’s plan , dubbed “Abenomics”, are fiscal stimulus through debt financing, quantitative easing and a structural reform of the overall Japanese market. While this policy has been in place for five years, it has yielded mixed results; Japan’s GDP has remained constant from $5.16T in 2013 to $4.87T in 2017, but inflation is still low, hovering around 0.8% as of January 2018. Abenomics is a response to Japan’s economic stagnation, which has roots back to the beginning of the 1990s, and experts are hoping that the Tokyo 2020 games will provide an additional stimulus for this stagnant economy.

After the end of the World War II, Japan entered into an unexpected period of economic growth. With the collapse of the Empire of Japan and the destruction caused by the atomic bombs, the world expected Japan to suffer. However, by the end of the 1980s, Japan quickly recovered and had one of the highest Gross National Products in the world, showcasing its healthy citizen labor force and its high national output. Such robust economic growth was a byproduct of low interest rates, dropping to 2.5% in 1989, which caused high valuations of real estate as well as excess borrowing from consumers to finance their more expensive lifestyles. However, in the early 1990s, the Japanese government tried to assuage the damage of a possible housing bubble by raising interest rates, so the Bank of Japan raised rates from 2.5% to 6%. This raise caused the stock market to crash, and ushered in a debt crisis as many debt holders were unable to make payments with such high rates, and investors became wary of borrowing more money.

As a response to the stock market crash, the Japanese government declared bankruptcy for large Japanese banks, with giants like Hokkaido Takushoku Bank being dissolved, and continued to cut interest rates to encourage consumer spending. There was only one problem with this solution: the collapse of the baking system changed the people of Japan. After the crash, consumption decreased as the demand to hold money increased, which adversely affected efforts, such as lowering borrowing rates, to jumpstart the Japanese economy. With less money in circulation, the Yen began to deflate,  causing people to consume even less, prices began to drip and  Japan entered into a deeper deflationary spiral. This continuous deflation was the first issue that continued to plague the Japanese economy for a number of years, known as the the Lost Decade, where the Yen spot rate hit a height of ¥146 in 1998 (for reference the Yen spot rate today is around ¥112).

The second pillar of the Lost Decade was economic stagnation, where the Japanese economy was at a standstill,  making small moves back and forth, never growing or shrinking a large scale. Japan’s most important exchange, the Nikkei 225, reached a height of around ¥39000 in December 1989. During the ten years after the crash the Nikkei 225 traded between ¥12948 and ¥26727 and to this day, has  been unable to trade above its 1989 high.

While Japan’s Lost Decade may have ended in the early 2000s, some of its effects are still being felt today. One of the most relevant consequences of the crash is the continued lack of spending by consumers as many are still worried, even 20 years later, about the stability of the Japanese banking system. Moreover, while not a direct result of the Lost Decade, another complication is Japan’s aging population. Due to the high cost of living, raising children in Japan has become expensive, especially in cities like Tokyo, which is hurting their already stagnant economy and creating a massive labor shortage. Forecasts show that within the next five years, 38% of the population will be above the age of 64. In an attempt to remedy the shortage caused by this demographic trend, Japan has introduced immigration reform, with the most recent being implemented in July of 2018, to encourage foreign workers to immigrate and help stimulate the job market. These acts have created an interesting economic environment for Japan, as the government still attempts to address deflation and a shrinking labor force. Another issue plaguing the Japanese economy is slow wage growth. The lack of workers should push wages higher, but Japan’s average wage growth since 1990 is around zero percent, which is further exacerbated by Japan’s deflationary spiral and the erosion of the Yen’s value. Without wage growth workers are not making more money, so they are not spending in order to stimulate the economy. These three factors have shaped the modern economy of Japan and many economists and experts have been perplexed as to how to fix these problems.


To that end, Abenomics has become an important experimental initiative in combating the after effects of the Lost Decade. Such prolonged economic stagnation with borrowing rates around zero makes Abenomics an interesting undertaking because the world is unsure of how the economy of Japan will respond to these policies. Indeed, while the implementation of Abe’s policies five years ago has begun to affect the economy, some experts are still wary of Abe’s policies and their long-term effects.

Works Cited

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Image source:

Reynolds, I. (2017, May 16). Japan’s Shrinking Population. Retrieved from

Abe, N. (2016, July 28). Japan’s Shrinking Economy. Retrieved from

Japan Inflation Rate  1958-2018 | Data | Chart | Calendar | Forecast. (n.d.). Retrieved from

Japan Interest Rate  1972-2018 | Data | Chart | Calendar | Forecast | News. (n.d.). Retrieved from

Kuepper, J. (2018, August 17). Japan’s Lost Decade: Brief History and Lessons. Retrieved from

Nikkei 225 Index – 67 Year Historical Chart. (n.d.). Retrieved from

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