An Exploration of the Japanese Slowdown during the 1990s

by Diego A. Comin

Overview — Why was the 1990s a lost decade for Japan? HBS professor Diego Comin argues that it was the combination of some shocks that lasted for about three years and the response of companies that drastically reduced their expenses in adopting new technologies and developing new ones. Though the severe shocks that hit the Japanese economy did not persist, the investments that Japanese companies and entrepreneurs did not undertake to improve technology and production methods during the 1990s propagated those shocks and made their effects very long-lasting. Key concepts include:

  • Technology adoption decisions by firms are a powerful force in propagating shocks and making their effects very persistent.
  • This explains why shocks that lasted for about three years generated a productivity slowdown over a decade.
  • This same model accounts for economic fluctuations in the U.S.
  • In light of this, a critical factor to predict the macro consequences of the current financial crisis in the U.S. is the persistence of the shocks. Since the current shocks are unlikely to last for three years or so, it is unlikely that the U.S. experiences a "lost decade."

Author Abstract

Why was the 1990s a lost decade for Japan? How is it possible that the Japanese economy stagnated for a decade if none of the shocks that arguably hit the economy seemed to have persisted for much more than three years or so? In this paper I show that the endogenous development and adoption of technologies can propagate these shocks making their effect much more persistent. When feeding the markup shocks observed in Japan during the early 1990s, the model is able to generate time series for output, TFP, employment, consumption and investment that track closely the actual data. In particular, the productivity slowdown in the model is as protracted as in the data. Reassuringly, I also find evidence that, as predicted by the model, the speed of technology diffusion slowed down in Japan during the 1990s and R&D expenditures also stopped growing.

Paper Information