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Accounting for the 'Lost Decade' in Japan


  • Suparna Chakraborty

    (Federal Reserve Bank of Minneapolis & University of Minnesota)


There is no debate amongst economists that Japan performed poorly during the1990s. This can be seen in falling growth rates of GDP per capita, investment per capita and mounting problems of non performing loans and ballooning Government deficit. A lot of models have tried to come up with an explanation for the Lost Decade. However, none of them have yet been able to clearly account for the growth slump. At this point, it is necessary to revisit all possible distortions that might have caused the dismal performance during the 1990s. This would help us to correctly identify the possible problem areas and search for more specific causes of downturn of the economy in a considerably narrowed field. In this paper, I have tried to bring together the different proposed theories in a consolidated way to help isolate promising theories from not so promising ones. To do so, I applied the Business Cycle Accounting procedure developed by V V Chari, Ellen R McGrattan and Patrick Kehoe to the Japanese case. I find that efficiency wedge is important in explaining the dismal performance of the Japanese economy during the 1990s but labor wedge is not very important except for a brief span of time during 1996 to 1997. My most important result is that investment wedge played a major role in the performance of the Japanese economy during the 1990s. So, any model that tries to focus on what went wrong in Japan in 1990s would do well to focus on frictions on productivity and investment financing that might be at the root of the dismal performance of the Japanese economy.

Suggested Citation

  • Suparna Chakraborty, 2004. "Accounting for the 'Lost Decade' in Japan," Macroeconomics 0408009, University Library of Munich, Germany.
  • Handle: RePEc:wpa:wuwpma:0408009
    Note: Type of Document - pdf; pages: 51

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    Cited by:

    1. Kobayashi, Keiichiro & Inaba, Masaru, 2006. "Business cycle accounting for the Japanese economy," Japan and the World Economy, Elsevier, vol. 18(4), pages 418-440, December.
    2. Jagjit S. Chadha & James Warren, 2013. "Accounting For The Great Recession In The Uk: Real Business Cycles And Financial Frictions," Manchester School, University of Manchester, vol. 81(s2), pages 43-64, October.
    3. Gao, Xu, 2007. "Business Cycle Accounting for the Chinese Economy," MPRA Paper 7050, University Library of Munich, Germany, revised Dec 2007.
    4. Alan Ahearne & Finn Kydland & Mark A. Wynne, 2006. "Ireland’s Great Depression," The Economic and Social Review, Economic and Social Studies, vol. 37(2), pages 215-243.
    5. Robert F. Martin, 2005. "The baby boom: predictability in house prices and interest rates," International Finance Discussion Papers 847, Board of Governors of the Federal Reserve System (U.S.), revised 2005.

    More about this item


    Accounting; Business Cycles; Japan; Lost Decade; Kalman Filter;

    JEL classification:

    • E - Macroeconomics and Monetary Economics

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