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Japan’s economy: from the “lost decade” to Abenomics

Published Thursday, October 24, 2013

The effects of the sluggish growth in the 1990s ("the lost decade") are still being felt today in Japan's economy. A new government has embarked on a radical plan to revitalise the fortunes of the world’s third largest economy. These policies have become known as Abenomics, after the new Prime Minister Shinzo Abe.

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In the post-war period Japan’s economy grew rapidly, averaging annual growth of 10% during 1955-1970, and around 5% in the 1970s and 1980s. Large bubbles developed in the property and stock markets in the late 1980s, the collapse of which led to sluggish growth in the 1990s, known as the “lost decade”. Lingering effects of this were still felt in the 2000s, as a modest economic recovery in the mid-2000s gave way, as in much of the world, to a deep recession in 2008-2009. Recovery was set back by the March 2011 earthquake and tsunami.

The Japanese economy, the world’s third economy, currently faces three main problems:

• weak growth over the past two decades, caused, in part, to structural problems;

• deflation (falling prices) which has become entrenched since the late 1990s and has had a harmful effect on the economy;

• the high level of public sector debt. A weak economy and repeated government stimulus plans have led to debt levels currently unparalleled among major economies. Gross debt stood at 238% in 2012 (compared to 90% for the UK).

A newly-elected government led by Prime Minister Shinzo Abe has embarked on a radical plan revitalise the fortunes of the economy. These policies have become known as Abenomics and can be grouped into three main strands:

• monetary policy – the Bank of Japan has dramatically expanded its quantitative easing (QE) programme, to be more aggressive in its attempts to end persistent deflation by injected more money into the economy;

• fiscal policy – a short-term stimulus designed to boost economic activity followed by a medium-term plan to reduce the large deficit and stabilise the level of public debt;

• structural reforms – a growth strategy for the longer-term made up of structural reforms to the labour market and deregulating some sectors of the economy.

Commons Briefing papers SN06629

Author: Daniel Harari

Topics: Economic policy, Economic situation, World economy

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