The Global Economic System: How Liquidity Shocks Affect Financial Institutions and Lead to Economic Crises

Chapter 4. Japan’s Lost Decade

In this chapter, we turn to illustrating another historical economic crisis: the liquidity-shock induced recession suffered by Japan during the 1990s, sometimes referred to as Japan’s “Lost Decade.”¹ Just as we did when we looked at the Great Depression in Chapter 3, we’ll first review our general framework on how a liquidity shock leads to changes in the behavior of individuals and financial institutions and to negative effects on real economic activity, before we discuss actual events.

4.1 The Stages of a Liquidity Shock—Revisited and Expanded

The flowchart in Figure 4.1 provides a more abbreviated version of the stages of a liquidity shock and the resulting economic downturn that we discussed in Chapter 3, “The ...