Abstract

The 1990s were very difficult for the Japanese economy. Toward the end of the decade, Japan experienced a recession of a depth and duration virtually unprecedented for a major industrial country since the Second World War, a recession from which it has only recently begun to recover. Moreover, this sharp downturn followed a prolonged period of economic weakness dating back to the bursting of the asset price bubble in 1991. In fact, from 1991 to 1999, output growth averaged only a little over 1 percent, compared with around 4 percent achieved in the 1980s. This experience has led macroeconomic policymaking into uncharted territory and called into question many of the most basic tenets about the behavior of Japan’s economy, including the growth rate of potential output, the effectiveness of fiscal and monetary policies, and the strength of the Japanese system of corporate governance.1