The Japanese economy, after spectacular performance in the decades following World War II, has been surprisingly weak now for more than a decade. Figure 3.1 shows this remarkable contrast. From 1961 to 1989, Japan’s Gross Domestic Product (GDP) averaged a remarkable 6.37 percent annual growth rate. From then on, Japan’s GDP has posted only a 1.67 percent average growth rate. Something substantial clearly happened to the Japanese economy at the end of the 1980s. Certainly, the Japanese stock market and real estate market both collapsed spectacularly. But financial and real estate markets have collapsed before many times and in many countries, and the results are not always a decade of economic stagnation. Indeed, the US economy scarcely noticed the stock market collapses of 1907 and 1987. Why is the Japanese financial disarray of the late 1980s so difficult to transcend?
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