Japan's economy was the envy of the world in the 1980s—it grew at an average annual rate (as measured by GDP) of 3.89% in the 1980s, compared to 3.07% in the United States. But Japan's economy ran into troubles in the 1990s.
Japan's equity and real estate bubbles burst starting in the fall of 1989. Equity values plunged 60% from late 1989 to August 1992, while land values dropped throughout the 1990s, falling an incredible 70% by 2001.As a result, from 1991 to 2003, the Japanese economy, as measured by GDP, grew only 1.14% annually, well below that of other industrialized nations.
It is generally acknowledged that the Bank of Japan (BoJ), Japan's central bank, made several mistakes that may have added to and prolonged the negative effects of the bursting of the equity and real estate bubbles. For example, monetary policy was stop-and-go; concerned about rising prices called inflation and soaring asset prices. The Bank of Japan put the brakes on the money supply in the late 1980s, which may have contributed to the bursting of the equity bubble. As equity values fell, the BoJ continued to raise interest rates because it remained concerned with still-appreciating real estate values. Higher interest rates contributed to the end of rising land prices, but they also pushed the overall economy into a downward spiral. In 1991, as equity and land prices fell, the Bank of Japan dramatically reversed course and cut interest rates. But it was too late, a liquidity trap had already been set, and a credit crunch was setting in. Continue Reading from Investopedia
Japan's Lost Decade (1992) (International Banker)
Japan's Bubble Bursts (Washington Post)
Bright Lights, Big Shoulder Pads: A Timid Japan Recalls Its Bubble Era (New York Times)
How Japan has fared in 30 years since the stock market bubble burst (The Guardian)
The Lost Decade: Lessons From Japan's Real Estate Crisis (Investopedia)
