Phase III Lost Decade and Beyond
In phase III (the 1990s and on), the Japanese economy struggled with the aftermath of the burst ‘bubble’. Excessive
investment, excessive employment, and excessive lending and over-borrowing that had piled up during the bubble
development period had resulted in excess capacity and mounting non-performing loans. The necessary stock adjustment
of this ‘excess’, however, has been delayed in consideration of job security. This delay in adjustment resulted in longlasting
stagnation, persistent deflation, and financial crises, in spite of massive expansion of government expenditures and
the money supply. This, in turn, created a public domestic debt overhang. In order for the Japanese economy to get out of
this trap, a comprehensive strategy and bold structural reforms are indispensable. The Japanese economy is in the middle
of a multi-pronged fight to (1) stop deflation, (2) reform the public sector and its budget, (3) resolve problems associated
with non-performing loans and stabilize the financial system, and (4) to stimulate business sector confidence through
regulatory reforms, tax reforms, and a conducive environment for technology development.
The Japanese society, facing a rapid aging of its now-declining population, is now also confronted with reform needs in its
social security system.