The Bubble Economy and the Lost Decade

Although Japan’s economic recovery from World War II has often been characterized as an unparalleled success story, even a “miracle,” Japan’s course since the mid-1980s has been more of a roller-coaster ride, with both thrilling ascents and sobering falls. In the late 1980s, the Japanese economy boomed, driven by exuberance in the equities markets and skyrocketing real estate prices. Japanese consumers enjoyed unprecedented affluence; Japan boasted some of the world’s largest banks and corporations; skyscrapers sprouted around Tokyo; and Japan’s financial titans, flush with capital, went on a buying spree abroad, adding properties like Rockefeller Center and Pebble Beach Golf Course to their portfolios. Japan seemed headed for global economic dominance and some boosters (like the conservative politician Ishihara Shintarō and Sony founder Morita Akio in their 1989 bestseller The Japan That Can Say No) used this opportunity to celebrate Japanese culture, advocate an independent foreign policy, and stoke reawakening nationalist sentiments. Some Japanese worried about the social costs of seemingly limitless prosperity, especially the effects of affluence on youth and the increasing polarization of incomes in Japan’s famed “middle-class” society, but most simply rode the wave of rising wealth and global influence.

As became apparent in retrospect, the Japanese boom of the 1980s was not built on firm economic foundations but was fueled by stock market and real estate speculation, reckless lending practices in the financial industry, and irresponsible government policies. What is now known as the Bubble Economy imploded in the early 1990s, leaving in its wake insolvent banks, discredited bureaucrats, pessimistic consumers, and a host of economic problems that would prove profound and tenacious. When the bubble burst, land values plummeted, the stock indices tumbled, and economic growth ground essentially to a halt. Over what has come to be called the Lost Decade, the economy was moribund as corporations refused to invest, consumers refused to spend, and all of the standard economic remedies (relaxed monetary policies and generous government spending) failed to spark a recovery. Meanwhile, the political landscape was upset by the collapse of the Liberal Democratic Party, which splintered and lost hold of the prime ministership in 1993, for the first time since the party’s founding in 1955. Japanese society also seemed to be in disarray, as divorce and delinquency rates spiked, suicides increased, and a series of crises—the Aum Shinrikyō sarin gas attacks on the Tokyo subway, the Great Hanshin Earthquake that devastated Kobe—revealed the weaknesses of the Japanese social fabric.

Although, with the new millennium, the Japanese economy began to show signs of revival, the LDP was able to regain its familiar political dominance, and social problems became facts of life rather than shocking revelations, the Japanese reluctantly came to recognize that the good old days of the high-growth era and the Bubble Economy were history. The broad social consensus that characterized postwar Japan, stressing economic growth as the prime national goal and personal advancement as the prime individual one, has fractured, leaving many to wonder and debate what defines Japanese identity in a new century and a new economic, political, and social context. At the same time, Japan is struggling to find solutions for many pressing issues, most of which (immigration, an aging society, environmental concerns) are shared by other liberal democracies around the globe.