2 - The Transformation of the Japanese Economy Since the Early 1990s

Summary

Japan has experienced a stagnant economy since the collapse of the bubble economy in the early 1990s. Several structural reforms have been implemented to stimulate the economy by the LDP-led coalition governments, most notably by the Hashimoto administration in the 1990s, the Koizumi administration in the 2000s and at the time of writing, the second Abe administration. As a result, the Japanese economy has experienced some significant transformations. However, it has also maintained some old characteristics.

This chapter will first examine the economic stagnation in the 1990s after the collapse of the bubble economy with reference to non-performing loans and the Asian financial crisis of 1997‒98. It will discuss the economic reforms that were initiated by the non-LDP coalition government between 1993‒94 and were succeeded by the LDP's Hashimoto administration in the late 1990s. The chapter will then examine the economic reforms implemented by the Koizumi administration in the first half of the 2000s, followed by an analysis of the impact of the global financial crisis in 2008 and the economic policy of the government of the Democratic Party of Japan (DPJ) between 2009 and 2012. Finally, the chapter will discuss the “Abenomics” of the current Abe administration as its economic growth strategy.

ECONOMIC STAGNATION AFTER THE COLLAPSE OF THE BUBBLE ECONOMY AND REGULATORY REFORMS IN THE 1990S

Stock prices, which Japanese people believed would continue rising forever, suddenly dropped sharply in 1990. Land prices also started to drop at a dramatic rate. As a result of sharp declines of stock and land prices, investment came to a standstill and so began the decades of economic stagnation and low economic growth. Many Japanese companies that had borrowed excessively from banks without due diligence during the years of the bubble economy went bankrupt, as they could not repay loans with stocks or land as collaterals that were now devalued with the collapse of the bubble economy. As a result, Japanese banks faced the problem of non-performing loans, which were the loans that could not be repaid, and bank lending shrank significantly. In this economic situation, the LDP government, which had been in power since 1955, finally collapsed in 1993, also due to rampant political scandals.