Japan’s Lost Decade began after a major asset bubble burst in the early 1990s.
During the 1980s, real estate and stock prices surged due to easy credit, aggressive bank lending, and speculative optimism.
Land values in major cities tripled, and the Nikkei index nearly quadrupled.
When the Bank of Japan tightened monetary policy, asset prices reversed sharply.
The stock market fell more than 60%, property values collapsed, and banks—heavily exposed to real estate—were left with impaired balance sheets.
Instead of a quick recovery, Japan entered a prolonged period of weak growth, deflation, and financial restructuring lasting more than a decade.

What Drove the Crisis

Asset price collapse: Valuations had detached from fundamentals; the crash damaged household wealth and corporate balance sheets.
Banking system paralysis: Banks held massive volumes of non-performing real estate loans. Regulators allowed “evergreening” of bad loans, preventing necessary restructuring.
Deflationary spiral: Falling prices made debt harder to repay, discouraged spending, and increased saving, reinforcing weak demand.
Policy missteps: Fiscal stimulus was inconsistent, monetary easing was slow, and structural reforms were delayed, prolonging stagnation.

Investor Lessons

A burst asset bubble combined with impaired banks can trap an economy in long-term stagnation.
Slow recognition of bad loans and support for unproductive firms reduce growth and delay recovery.
Deflation is difficult to escape once expectations become entrenched.
Monetary policy is less effective when banks are weak and households focus on repairing balance sheets.
Investors must watch credit cycles, understand when prices detach from fundamentals, and recognize that economies can stagnate for years if structural issues go unresolved.

Japan’s Lost Decade (1990s)