Mumbai: Japan was once known as the ‘America of Asia’. In the 1980s, Japan became the world’s second-largest economy. Brands like Sony, Panasonic, and Toyota were household names.

Land prices in Tokyo were so exorbitant it was said that ‘Tokyo’s Imperial Palace was more expensive than the entire state of California’. However, by 2025, Japan has fallen behind India.

Japan’s Economy Declining

Japan held the title of the world’s fourth-largest economy for a long time, but recently it slipped to fifth place, falling behind India. Japan’s economy has been in crisis for some time, and analysts in a CFO study revealed the reasons behind this decline.

They stated that Japan has been providing loans at zero percent interest rates for decades, which has now become a burden for the country as its old policies are no longer effective. Additionally, analysts noted that Japan is currently stuck in two whirlpools from which it must emerge. Let’s delve into the details.

What Caused the Decline of the Japanese Economy?

The decline of Japan’s economy began in the early 1990s, but before that, the 1980s saw tremendous growth in Japan, which was actually based on a massive asset bubble. There was extensive speculation in real estate and the stock market. When this bubble burst in 1990, banks were left with billions of yen in bad loans. The stock market crashed, property values plummeted by 80 percent, and consumer spending sharply declined.

What followed is known as Japan’s Lost Decades—a period of no growth, no investment, and no wage increases. This stagnation lasted from 1991 to 2010, and its effects are still being felt. Japan’s economy has never fully recovered.

Decades of Zero Interest Rate Lending

According to a report published in Business Today, Japan allowed the world to borrow at cheap rates for decades, but this system is now breaking down. CFO trainer Lakshmi Shah explained that Japan maintained interest rates at or near zero, and sometimes even negative.

Struggle Begins as Inflation Rises

In March 2024, rising inflation and a sharp depreciation of the yen forced the Bank of Japan to raise interest rates and begin a swift withdrawal from its ultra-loose policy. This decision disrupted the yen carry trade. As a result, investors rushed to unload positions and the yen strengthened, much like in 2007 when a similar unwinding almost completely wiped out the trade. The outcome was a recession in the Japanese economy.

Current Adverse Effects of Old Policies

Lakshmi Shah stated that Japan is now caught between two major pressures. On one hand, the country needs to control inflation, and on the other, it must keep the yen safe—which means keeping interest rates low and risking capital flight. Analysts believe that Japan’s old policies are now becoming ineffective. The tools that once supported Japan’s economy, including zero interest rates, large-scale bond purchases, and a weak currency, are now showing adverse effects.