Overview

Abstract

Japan’s transition out of the economic stagnation that followed the bursting of the land and equity price bubble in the early 1990s has been long and tortuous. Undermined by a cycle of deflation and financial instability, growth was intermittent and narrowly based for much of the decade. Dislocations in the banking and corporate sectors weighed on confidence and activity, while policy slippages and external shocks added to the headwinds. By 2000—about ten years after the stock market went into a freefall—GDP was some 40 percent lower than what it would have been if growth has continued at the 1990–91 rate. The price level, as measured by the GDP deflator, was not much higher than at the time the bubble collapsed, but on a downward trajectory that proved hard to reverse. As the new millennium dawned, Japan seemed bogged down in the deepest slump of its postwar history.