JAPAN’S ECONOMIC AND FINANCIAL strongSTAGNATIONstrong AND THE POSSIBILITY.pdf

JAPAN’S ECONOMIC AND FINANCIAL STAGNATION AND THE POSSIBILITY OF A SECOND LOST DECADE by Thomas F. Cargill Working Paper No 199 September 2004 Postal address: P.O. Box 6501, S-113 83 Stockholm, Sweden. Office address: Sveavägen 65 Telephone: +46 8 736 93 60 Telefax: +46 8 31 30 17 E-mail: japan@hhs.se Internet: http://www.hhs.se/eijs June 24, 2003 Japan’s Economic and Financial Stagnation and the Possibility of a Second Lost Decade by Thomas F. Cargill* Prepared for “Institutional Change in Japan: Why It Happens, Why It Doesn’t”, East-West Center, Honolulu, Hawaii, January 5-6, 2003 1.0 Introduction Japan’s postwar economic performance is remarkable1. In fact, with the exception of World War II and its immediate aftermath, the overall economic development of Japan starting with the Meiji Restoration in 1868 is remarkable. Raising from the ashes of defeat in World War II and achieving “Asian Miracle” status by the late 1980s, Japan fell into an economic, financial, and political malaise in the 1990s that continues to the present. The 1990s are now referred to as Japan’s “lost decade” and many wonder whether Japan has commenced a second “lost decade.” Economic, financial, and political developments in Japan since the century started appear to support the pessimistic second “lost decade” scenario. The economy again shifted into recession in the fourth quarter of 2000 and began a weak recovery in the first quarter of 2002. Real GDP increased only slightly in 2001 and 2002 (Table 1). The unemployment rate in 2002 was 5.7 percent and had steadily increased sin