In response, the Japanese government adopted expansionary monetary policies and invested heavily in public infrastructure projects. This led to an increase in disposable income for consumers and profits for businesses, which were then channelled into stocks and real estate markets (Japan Ends Era of Negative Interest Rates, 2024). This has created a situation where consumers and businesses had increased disposable income and profits, which was invested into stocks and housing. Increased investment led to soaring prices in both markets. The resulting surge in asset prices created a situation known as the “bubble economy,” where prices of stocks and real estate reached unsustainable levels.

When an economy experiences inflation, governments and central banks implement policies to increase downward pressure on the price. In 1989, Japan made a sudden turnabout in their easy monetary policy. Interest rates were raised, and a measure called the “Total Volume Control” was implemented to restrict commercial banks from lending to real estate brokers. These actions caused the stock and housing market bubbles to burst. 

What followed was a prolonged period of economic stagnation and deflation, often referred to as the “Lost Decades.” The slow recovery was attributed to various factors, including the Bank of Japan’s (BoJ) ineffective monetary policies, natural disasters, and global financial crises, all of which compounded the economic difficulties.

2019~2024: Post-Stagnation Recovery

It turns out, the negative interest rate policy did not work quite well, however Japan kept this policy going for more than 8 years. Meanwhile, external shocks such as the COVID-19 pandemic and the trade crisis caused by the Ukraine war led to global inflation. In Japan’s case, this inflationary pressure helped raise wages and other key prices, signaling the beginning of economic recovery after decades of stagnation.

In March 2024, Japan finally raised its interest rate, “ending the country’s historic era of negative interest rates” (Japan Ends Era of Negative Interest Rates, 2024). Inflation has continued to push up prices and wages, breaking the deflationary cycle that had plagued Japan for decades. This shift represents a significant milestone in Japan’s economic recovery, putting an end to the prolonged period of stagnation.

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