Japan : the peculiar crisis by Evelyne Dourille-Feer

From 1950 to 1990, the Japanese economy was characterized by its unique capacity for swiftly recovering after crisis. Indeed, the annual rate of GDP growth had already dropped from 10% to 5% between the 1960’s and the 1970’s and ,4% during the following decade. But the economic sharp slowdown of the 1992-2003 period and the short-lived recovery phases have shown the very peculiar nature of the ongoing crisis in Japan which was radically different from those experienced in the past.

However, has Japan really undergone a “crisis”? Theoretically, an economic crisis is defined as a brief turnaround of the economic situation followed by a recession or a long depression like those of 1929. Since the end of 1991, Japan’s economic situation is in keeping with this double definition. But, when looking to other economic indicators like trade value, currency reserves, world position as net creditor, R and D expenses to GDP, quite a positive vision of the evolution of the Japanese economy emerges. That is why some analysts question the prevailing current of analysis based on the assertion that the Japanese economy has gone through a deep economic crisis since the beginning of the 1990s. For the Japanologist economist who is more prone focussing on the specificities of an economy than trying to make it enter into standard macro-economic analysis, it is therefore important to analyze what this so called « crisis » conceals.

Liberal interpretation of the Japanese crisis

After 56 months of continuous expansion (November 1986 –July 1991), the Japanese economy slows down, enters into recession, and then alternates revival and slow-down phases, even registering two years of negative or near 0 growth in 1998 and 2002. This brutal reversal of the economy results from the tightening of the currency policy between May 1989 and August 1990* which made the speculative bubble burst in the stock market (1990) and the real estate market (1991) and brought business to a standstill. Therefore, between 1991 and 2003, the annual GDPgrowth rate only reached 1% on average and the economic growth rates of the recovery periods were well behind those of the 1980s.
In addition to the stock market and the real estate crisis, the banking system crisis deepened until summer 1998 when a ‘credit crunch’ situation appeared. The entire financial system was deteriorating and deflation took root from 1999. Furthermore, unemployment rate leapt from 2.1% to 5.4% between 1991 and 2003. Parallel to the high indebtedness of the private sector, the public sector’s debt quickly increased from 61% to 156% of GNP during the same period.
According to a liberal perspective, the crisis is obvious. The diagnosis is clear: market forces have not stabilized the financial system that is both overly regulated and complex, hence a bad allocation of the capital has prevented new sectors from emerging and getting reorganized. Therefore, companies have lost their competitiveness, their average return on investments have contracted and have led to weak job offers and redundancies. The prescribed remedy is to accelerate deregulations. These deregulations enable competitive supply to emerge and mechanically generate demand growth. But, real economy is not working so simply.

A crisis more social and political than economic

If we stop focussing on economic growth rates, problems of supply and market failures, other indicators tell a very different story. For example, if we look at the balance of payments data, i.e. data of Japan's transactions with foreign countries, we notice that the 1990s were far from being an ‘empty’ decade.
The export value as well as the current surplus doubled in the 1990’s compared with the 1980’s**. Therefore, the amount of currency reserves held by Japan increased from 24.6 to 461.2 billion dollars between 1980 and 2002, setting her as world number one. It has also preserved its position as world top creditor nation reached during the 1980s owing the quadrupling of its assets abroad between 1990 and 2000. Internally, the households’ net assets stock currently amounts to twice the GDP. Finally, The R and D effort was thoroughly maintained during the whole period of crisis, that is why Japan reached the second position behind the United States as patent exporter.
Nevertheless, in 2001, only 31% of the Japanese thought that their country prospects would be better ten years ahead against 48% of the French. These statistics reflect the distrust of the Japanese households towards political circles who are often corrupted and incapable of instilling confidence in the future because the implementation of reforms (improvement of the financial system, privatizations, deregulations, fiscal reform) is slow and because there is no clear design of a new society.


The erratic growth of the last twelve years appears closely linked with the instability of consumption and, therefore, with the anxiety of the Japanese households towards an uncertain future. The main focus of the after war socio-economic development model was the economic catching up with Western countries. This model was relevant in the context of a closed domestic market and it was relying upon a strong regulatory State, companies assuming a social protective function, households stockpiling savings and employees rewarded for loyalty towards their enterprise. But, it does not conform anymore to the new environment of globalization and to the financiarization of economies. While the men/women, young/ old, metropolis/regions relationships are undergoing fundamental transformation, no new socio-economic model adapted to the rapid ageing of population is emerging. Criminality rises; the attitude of youth towards work ethic becomes more cynical... So the Japanese ‘crisis’ is above all a model crisis and a confidence crisis affecting the economy. The understanding of these complex mechanisms requires a three dimensional analysis including economy, sociology and politics.

January 2004

* For this period the rate of discount is increased from 2,75% to 6%.
** Given as spent dollars
The opinions expressed in this article commit only the author.