Introduction

The immediate effect of the collapse of asset prices in 1990 and 1991 was recession, disinflation, and weakened balance sheets for financial institutions and corporations; however, this economic and financial distress intensified over the decade. The decade has frequently been characterized as Japan's “lost decade” in terms of lost financial and economic development, but because the economic and financial distress continued until 2005, one could just as easily refer to the entire period as a decade and half of lost financial and economic development. The 1990s also witnessed political instability and uncertainty with the end of the “1955-System” of LDP rule and party realignment.

This chapter focuses on the economic and financial distress of the 1990s and ends with a summary of the most important policies of the Koizumi government starting in 2001. Although economic and financial distress continued for several more years, the economy would experience a significant turning point after Koizumi became prime minister.

The Cabinet Office's official business cycle turning points (see Table 5.1) indicate that Japan experienced a series of business cycles during the past decade and half. The three “expansions” after the collapse of asset prices with the most recent starting January 2002 and continuing through late 2007 mask a stagnant economy. Real GDP growth averaged 1.2 percent from 1991 to 2003, the year in which most observers conclude that the economy began a sustainable recovery.