Economic Boom to Bust: Causes Behind Economic Stagnation in Japan

Japan’s post-world war efforts to rehabilitate the economy led to global economic success well into the early 1990s. To revitalize the economy, Japan necessarily utilized limited trade restrictions and fixed exchange rates imposed by the U.S. to take international trade by surprise. Although economic performance proved to be prosperous for nearly three decades, prolonged economic stagnation appeared in the early 1990s and continued for a decade. As a result of stagnation, economic growth was drastically reduced, and deflationary periods were sparked. This paper aims to identify the underlying causes of stagnation in the Japanese economy. In doing so, I will use the principles of the neoclassical growth theory to analyze two endogenous growth factors (labor and capital) to see how they pertain to economic stagnation in Japan.