How a Fading Japan Regained Its Superpowers
The country was once the model of capitalist decline. But those recessionary decades are finally over. Where will Tokyo flex its muscles?
When I moved to Japan, the country was searching for a way out of a long era of economic decline. The Japanese had called it ushinawareta junen — the Lost Decade. But they were wrong. The first Lost Decade would become a second, and then a third. In 2003, during the overlong rainy season when I arrived, the gloom refused to dissipate. About 13 years earlier, on Dec. 29, 1989, the economy had reached a historic peak when the Nikkei 225 Stock Average hit a high of 38,915.87 points. But since then, the downturn would not be banished — much like the stifling low-pressure front that hung over Tokyo when I made my way into the largest metropolis on earth.
The malaise was not immediately visible to me. I’d come as part of an exchange program to teach English in rural Hiroshima. Like many of my generation around the world, I’d been exposed to Japanese culture since my childhood in Ireland and it seemed a good fit for someone fresh out of college: It was sophisticated, technologically advanced and far enough away from home.
But as I became attuned to life in Japan, the symptoms — like those of a chronic illness — became clearer. Deflation was persistent; cost-cutting was everywhere. Brands targeting price-conscious customers were ubiquitous — such as fast-fashion pioneer Uniqlo, which had just begun to venture overseas. Unemployment was just a shade off a postwar high. The media fretted over freeters and NEETs, buzzwords for young people who’d fallen out of the labor market1. That manifested in vicious ways: 2003 would see the peak for suicides, with more than 34,000 people taking their own lives. Meanwhile, homelessness was surprisingly visible. In Tokyo’s Ikebukuro station a few months after my arrival, a man accosted me in halting English, then dropped to his knees to beg for coins.
In the 1970s, Tokyo assumed a disruptive role after its postwar industrial policies started to bear fruit, its economy having been restarted by US procurement during the Korean War. By the 1980s, the US perceived Japan as an economic threat almost to the same degree the Soviet Union was a military one. American workers and Detroit carmakers were alarmed by the rise of Japanese rivals, an anxiety that expressed itself in protectionist politics. Jaws dropped when Mitsubishi Estate Co. bought New York City’s Rockefeller Center in 1989. Suspicions that Tokyo aimed to reassert itself as a military force in Asia also caused consternation.
Those fears passed in the 1990s when Japan began to vanish from the spotlight. Much of the world’s media, distracted by the rise of China, showed little interest in the once-fearsome economic superpower. If anything, “Japanification” became a catchword for “decline.” Westerners tut-tutted the dawdling politicians who were building supposedly pointless infrastructure — “bridges to nowhere” — instead of tackling reform. Howard W. French, who was the New York Times bureau chief in Tokyo the late 1990s, wrote that Japan could be “returning to its rightful place in the world, that of a middling country of vastly diminished and still declining importance in world affairs.”
But now, my 21st year in Japan, something has happened. On Feb. 22, the Nikkei 225 closed at 39,098.68, finally breaking the record set at the end of the 1980s. It was both an economic and psychological milestone — and the result of a confluence of painstaking policy changes, geopolitical imperatives and sheer luck. And there’s far more than the market breakthrough to prove that the country is out of its funk: everything from global diplomacy, financial and corporate vitality, military strategy, pop culture and even sports (Shohei Ohtani ranks among the world’s most famous athletes).
Nikkei 225’s Three Decade-Long Roundtrip
After more than 34 years, Japan stocks finally hit a new record in 2024
Source: Bloomberg
Japan has not become the world’s foregone conclusion, a developed country fallen into economic senescence in a fate that supposedly awaits all nations on the capitalist road. That should come as a relief to other countries that increasingly resemble Japan of the Lost Decades, especially China. Foreigners still cling to stereotypes of a nation that no longer exists — a nation perversely attached to faded glory. The country is vibrant, versatile and confident. The late prime minister Shinzo Abe, who was instrumental in getting it back on its feet, wanted Japan to be “a normal country,” not a lost one. Now it is. “Once upon a time in Japan” may be the curse every nation must deal with, but, at this point of the story, Tokyo’s tale offers hope. Decline is not irreversible.
I’m not arguing the country is now destined for a new golden age. The Nikkei has already fallen back below its record. Both promise and peril abound. Japan’s economy faces bifurcation. Those with skills in demand or in population centers will see opportunities multiply; others may see their lives stagnate. How will the population cope with a declining labor pool? Can it increase immigration without the ructions in Europe and the US? And how will it contend with China? There’s also the predictably unpredictable: the chances of an earthquake beneath Tokyo, and a much larger one that could devastate the Pacific coast generate public anxiety.
But all normal countries have anxieties. They just aren’t paralyzed by them.
Japan is no “middling country of declining importance”; it’s an active player in the world once more, and different from the audacious power of the 80s. The Lost Decades transformed the country, and it is continuing to evolve as it climbs out of its economic doldrums. This is how Japan changed the plot.
A Japan That Bubbled and Burst
The
Nikkei 225’s 20th-century high came on the last trading day of the
1980s, between the fall of the Berlin Wall and the collapse of the
Soviet Union. As the West set off on a post-Cold War boom, Japan’s index
came tumbling down. A massive asset bubble had finally burst.
The market pinnacle had been built on sand: overvalued real estate and stock prices buoyed by speculation, easy credit and loose central bank policies. That enthusiasm was unsustainable. The downward spiral exposed weaknesses in the financial system, including balance sheets that were dependent on inflated assets and non-performing loans. It eerily echoes what’s happening now with China’s property crisis, and perhaps even the often-irrational exuberance of US equities.
The downturn didn’t bite all at once. The early ‘90s are still considered peak bubble; Juliana’s nightclub in Tokyo’s Shibaura, synonymous with the era’s super-frothy excess, didn’t even open until the middle of 1991. By then, however, the Nikkei 225 had lost a third of its value.
As the rest of the world prospered, Japan’s financial system froze up. By the mid-90s, economic decline was undeniable. Banks wobbled and failed; the unbudgeable Liberal Democratic Party was briefly ejected from power; massive fiscal spending failed to solve the crisis; Moody’s downgraded its sovereign debt. Deflation set in, dampening business and consumer spending. Wages stagnated. A devastating earthquake struck Kobe and killed 6,000 in 1995; a few months later, the cult Aum Shinrikyo attacked Tokyo’s subway system with sarin gas.
By the end of the 1990s, the phrase Lost Decade had become commonplace. It was previously used to describe the period from 1982-1989 in Latin American when Mexico, Brazil and Argentina struggled to service their enormous international debt. Into the 1990s, Japan was a healthy second to the US in terms of global trade. It soon fell dramatically behind China.
Japan Loses Top Status for the Few Partners It Had
China’s importance to world trade surged as Japan’s stalled
Source: World Bank (WITS database)
When I landed in 2003, the country appeared to be turning a corner. Prime Minister Junichiro Koizumi had taken charge; his quest for reform was as popular as his public persona. Fans hailed his Richard Gere-like looks and lion mane of hair. Optimism grew for his plans to solve the banking crisis. In a 2005 snap election to strengthen his control over the LDP, Koizumi parachuted Takafumi Horie, a brash young tech entrepreneur, into the Hiroshima district where I lived, to run against a rebel member of the party. I remember standing among excited voters at a supermarket listening to Horie speak. Politics seemed to be moving in the right direction.
It wouldn’t last. Horie lost and was arrested months later for securities fraud. Koizumi left office in 2006 at the end of his term as party leader, his reform agenda only half-complete. He was replaced by Shinzo Abe making his first turn as prime minister. Abe flamed out after just a year, leaving office in ill health. Japan’s premiership became a revolving door again, spinning faster than ever as the Global Financial Crisis hit in 2008. In February 2011, a few weeks after I moved from Osaka to Tokyo to take up a position at Bloomberg News, Japan lost its long-treasured place as the world’s second-largest economy to China. Just a month later, the catastrophic 2011 Tohoku earthquake and tsunami fractured a nuclear power plant in Fukushima
and killed more than 18,000 people. The economy fell back into recession. The stifling ushinawareta era kept hanging on.
The Advent of Abenomics
Many
policymakers refused to deal with the complexity of the crisis,
believing that one simple fix would restore the boom times. No one
wanted to rock the boat too much, even when it had sprung multiple
leaks. Few were willing to say it was sinking. US officials learned from
Tokyo’s dithering and moved early when faced with the 2008 financial
crisis. China, which has many of the symptoms of Japan in the late
1980s, should take note, too.
The first truly effective game plan had to wait for Abe’s return as prime minister in 2012. His signature “Abenomics” program sought to stimulate economic activity through government spending and central bank bond-buying. Japan’s woes were structural and beyond the control of any one person. But Abe proved that an individual leader still mattered when it came to picking the right solutions.
Parts of the strategy to save the economy emerged from its central bank. In 1999, the Bank of Japan lowered rates to zero — the first country ever to do so. They would eventually go below zero, and central bank chief Haruhiko Kuroda — an Abe appointee who ran the BOJ for a decade — would stubbornly keep them there through the end of his tenure a year ago. While the side effects were substantial and sometimes adverse, easy money helped stabilize the yen and exports. The goal was to defeat deflation and reach a 2% inflation rate that would, theoretically, sustain renewed wage growth. Economists still debate how much the BOJ had to do with the turnaround, but the inflation goal has now been reached and breached, standing at 2.6%. Kuroda’s successor, Kazuo Ueda, in March raised interest rates for the first time in 17 years.
Abe resigned in 2020, his health aggravated by dealing with the Covid pandemic. He would be assassinated at a 2022 election campaign event by a man with a vendetta against the Unification Church who believed Abe supported the religious group. Two prime ministers later, the LDP still largely hews to Abe’s vision. Any successor to Prime Minister Fumio Kishida will be expected to embrace key aspects of Abenomics.
While economic analysts are still divided on the lasting impact of Abe’s policies, one reform he pushed appears to have paid off: the introduction of the country’s first corporate governance code in 2015. It included measures that encouraged executives and boardrooms to boost valuations and make corporate behavior less opaque.
Another individual — a famously astute overseas investor — would take notice. His name: Warren Buffett.
The Oracle of Omaha Goes to Tokyo
Buffett declared he was bullish on Japan when he took
5% stakes in its gigantic trading houses in 2020, long before the
market began to tick upward, and boosted those holdings two years later.
When the Nikkei broke its record in February 2024, Buffett’s
investments, the biggest overseas for Berkshire Hathaway Inc., had
appreciated by nearly $19 billion2. As his long-time deputy Charlie Munger said
in 2023, shortly before his death, “It was awfully easy money. It was
like having God just opening a chest and just pouring money into it.”
Abenomics had a surprise for those who expected an opaque Japan. Companies are now treating shareholders better, selling off unproductive units, or even delisting if they can’t raise value. They are also ending the pernicious practice of cross-shareholding, where large companies buy stock in one another to fend off hostile takeovers. Activist investors, once derided in the press as “vulture” funds, are now welcomed because they shake up boardrooms.
The surge of interest in Japan was boosted by a fear of missing out among other investors. The shortsightedness had been made worse by the pandemic, which isolated a country already seen as far away and struggling to amplify its message beyond its own borders. The 2020 Tokyo Olympic Games, intended to be the crowning achievement of Abe’s premiership, were delayed by a year and ultimately held without spectators.
But Japan was almost unique among developed nations in containing the pandemic without enforcing a lockdown. Authorities did little more than issue “strongly worded warnings.” Far from seeing a surge in deaths, it had among the lowest levels of mortality among leading developed nations, despite its elderly population. As a result, social disruption was relatively limited.
The economy stalled. But half of everything is luck: The border controls that kept out overseas visitors longer than other countries created pent-up interest in the country. When borders were reopened and travelers returned, they liked what they saw. After Buffett’s trading-house purchase, investors had all the signals they needed. Japan was a buy.
Labor’s Long Wait for Higher Pay
The
employment ice age of the 90s is also over. In fact, many employers
realize they have to pay higher salaries to attract and keep talent.
It’s a dramatic contrast from when I last worked at a Japanese firm. Shortly before the Global Financial Crisis, I joined Capcom Co., a maker of videogames in Osaka. Workers then took what they were given. Prestigious companies would often pay less than their competition, leveraging name recognition and the promise of job stability. Recently, Capcom made waves by offering a series of pay hikes; fresh graduates were given a 30% increase from previous new hires. The company’s shares are up nearly 1,500% since I left in 2010. Paying more is paying off.
In the Lost Decades, wages flatlined as workers opted for employment stability instead of wage growth. The slump led workers to hoard cash instead of spending, depressing prices and exacerbating deflation. The annual shunto wage negotiations — which take place between unions and corporations, consolidated across all sectors — disappointed workers constantly. But this year, large companies agreed to pay out the most in three decades to keep up with inflation.
Kishida is taking an active role in encouraging companies to boost wages, which have fallen far behind many Western economies. “We will make sure that incomes exceed the rise in prices,” he said. “From next year onward, we will make sure that wage increases that exceed the rise in prices will be firmly established.”
More than political pressure, change may come from the tremendous shortage of labor. As companies struggle to find staff, college graduates are in a seller’s market. In the past, the country turned to retirees and other under-utilized parts of the workforce, but there’s no quick fix now. Japan has some of the highest rates of labor participation in the world.
Women in particular have been mobilized. A higher percentage are in work than in the US or Europe, even if some remain in low-paying or part-time roles. While relatively few have reached the C-suite at listed companies, they are increasingly visible in management. And although there is a paucity of female politicians, one serious candidate to succeed Kishida is a woman, Foreign Minister Yoko Kamikawa.
Japan is increasingly willing to welcome foreign-born labor. While more cautious than western nations, it’s become home to more than 2 million overseas workers — a figure that’s doubled in less than a decade. The government has broadened the types of jobs foreigners can get visas for, and introduced fast-tracks to permanent residency.
Younger Japanese are also taking more risks. High-level students are more willing to consider alternatives to the traditional elite-level salaryman paths of banking, trading houses or the civil service, opting to join or establish startups. Even bureaucrats are quitting in record numbers to pursue private sector or entrepreneurial employment.
The hope is that higher wages will feed back into the economy, and banish that most pervasive of Lost Decade-era woes: deflation. Falling prices dogged the country since the late 1990s. Nothing has obsessed government so much as the economy was sapped of vitality. Now, authorities are close to declaring a formal end to the era. In one way, that announcement has already been made. BOJ Governor Ueda recently told parliament the bank expects prices “will continue as they did last year, so in that sense, we are in a state of inflation, not deflation.” Obvious, yes, but the first time someone so senior has acknowledged it. It was a significant coincidence the declaration came on Feb. 22, the same day the Nikkei 225 hit its new record.
Learning From Tokyo’s China Playbook
Japan
bristled at the rise of China. But what goes around comes around. As
President Xi Jinping’s autocratic grip grows more oppressive (and as the
mainland’s economy begins to age and slow), capital and cash are
fleeing China and Hong Kong. That gush of investments has contributed to
the resurgence of Tokyo property prices, with apartments rising above even their massively overblown 1980s valuations — this time, though, with little evidence of a bubble.
Demand for Tokyo Homes Spike
Japanese capital’s once-moribund housing market is enjoying a moment
Source: Real Estate Economic Institute
It’s a satisfying turn of events. If Japan is any glimpse of the future, its China experience foretells a debacle for the US and the West. When China’s growth was accelerating, American companies chased the fantasy of ever greater riches as Beijing liberalized. Japanese companies made the same mistake long before, only to see their intellectual property rights trampled and technology stolen. Tokyo understood the need to de-risk, if not decouple, from the People’s Republic much earlier. They became pioneers of the “China +1” philosophy, diversifying investment from the mainland to include Beijing’s manufacturing rivals in Vietnam, India and elsewhere.
Innovation Shrinks in Japan, Grows in China
China has surpassed both Japan and the US in patent applications
Source: World Bank
The US policy shift away from China, begun under Donald Trump and accelerated under Joe Biden, has done more than anything to help return Japan to global visibility. The now-defunct Democratic Party of Japan, which ruled from 2009 to 2012, at times sought to move the country closer to Beijing. Abe instead doubled down on the US alliance.
For decades, Japanese remilitarization was viewed with suspicion, both domestically and abroad. That’s begun to change. The postwar “peace constitution” renounces war and, in theory, forbids the possession of an army. But Abe was a realist. Russia, China and North Korea are among its closest neighbors and are not particularly neighborly. Wrapping Tokyo’s foreign policy around pacifism wasn’t going to assure its security. He wanted to make Japan fully responsible for protecting itself. The pacifist mindset, often derided as heiwa boke — “peace complacency” or, more pointedly, “peace senility” — led to the country shunning center stage in international affairs. Abe’s attempts to exorcise the pacifist ghosts often got him wrongly characterized as hankering for the militarism of imperial Japan. When he drafted a law in 2015 that would allow the military to fight overseas for the first time since World War II, tens of thousands of protesters took to the streets.
Abe coined what is now the US State Department’s policy of a “free and open Indo-Pacific” in 2016, back in an era when Xi was still being wooed with state visits. It was a concept he had outlined as far back as 2007 and is framed in Tokyo’s current strategy of winning allies who can hem in Beijing. Successive administrations have deepened alliances with countries similarly antagonized by China, including India and the Philippines. Today, US planners concede Tokyo’s approach to Beijing had been right all along.
Before the economic downturn, Japan was brash, even arrogant. The lost years, however, humbled the country and made it more inward-looking. Now, that dovishness is being set aside for a flash of talons. Tokyo realizes it needs to take its place as a leader in regional and global alliances if peace in Asia is to be preserved. Still, the new stance is risky. While nuclear-armed China has claims on islands Tokyo controls, Beijing is still its major trading partner. It’s a position China doesn’t hesitate to exploit; in 2010, it imposed an unofficial ban on rare earth exports to Japan.
China has made it easy for Kishida to push for a doubling of defense spending with barely a cry of protest. Its increasing its armed counterstrike capabilities, including the creation of its first fixed-wing aircraft carriers since World War II. All that is spooking China, where an official military paper recently fretted that Japan was adding “obvious offensive characteristics.”
Rahm Emanuel, the US ambassador, has become Tokyo’s biggest cheerleader in charting a new course. “Japan has done a series of right things at this very same time that China's done a series of wrong things,” he told me. “It's a new Japan, and all of us have to update our assumptions, our analysis and our expectations.”
The Soft Superpower
Many
Western journalists feared that Japan, in its economic doldrums, would
turn to a populist leader, perhaps the late Shintaro Ishihara, the
controversial novelist who later became Tokyo governor. He famously said
about the “peace” constitution: “What kind of a fool keeps the same
constitution that occupation troops forced upon us?” Instead, populism
is threatening democracy in the West, while Japan’s politics remain
stable.
Ishihara had his own prophecy — a much more accurate one.
In 1989, he correctly identified the importance of Japan’s then world-beating semiconductor industry and urged the creation of a 10-year advantage in chip production. At that time, the US military was deeply dependent on Tokyo’s tech, and Washington decided it had to wean itself from an economic rival. Japan eventually bowed to US pressure and fell behind in chips, while foundries in South Korea and Taiwan grew. The downfall of the chip industry overlaps almost perfectly with the Lost Decades. It’s a quintessential tale of squandered resources and misdirected capital.
Now, Tokyo is playing catchup. It’s supporting chip fabs in the south being built by Taiwan Semiconductor Manufacturing Co. It’s also all in on a bold, perhaps foolhardy attempt to make 2 nanometer chips by 2027 in a foundry in the north. The country is deploying tens of billions of dollars to rally its domestic champions in the chip supply chain in a manner not seen since the 1970s — this time with the support of the US.
That’s partly because Japan has learned how to exercise a different kind of power. It once sought to dominate commerce with hardware, like Sony Group Corp.’s Walkman. Today it has more success with the soft power of pop culture. Look no further than the outpouring of sympathy after the unexpected death of Akira Toriyama. He was the creator of Dragon Ball, a manga series that started in 1984 and gained strength even as Japan lost its economic way. World leaders and Hollywood stars, the government of El Salvador and the AC Milan football team all expressed condolences. Thousands cheered his memory in the streets of Buenos Aires, more than 18,000 km from Tokyo.
South Korea’s K-pop industry is valued at some $5 billion. But Japan’s anime market alone is some $30 billion. It is also expected to more than double in the next 10 years. The Pokemon series is frequently listed as the highest-grossing media franchise in history, dwarfing Marvel or Star Wars. Overseas, others cash in with anime-influenced cartoons. Walt Disney Co.’s new dramatization of James Clavell’s 1975 novel Shogun, which triggered earlier bouts of Japan-mania in the west, is a hit.
Like almost every business during the Lost Decades, the country’s soft power wobbled; even Nintendo Co. temporarily fell off as a force. Now, the internet and streaming have made it possible for Japan’s often-niche content to find a home in countless homes around the world. Those years might have been economically poor but, as often happens during downturns, they were culturally rich. The pandemic, with its stay-home consumption, helped supercharge the market even more. Today, Microsoft Corp. has all but ceded the console industry to Sony and Nintendo.
Japan Becomes World Tourist Destination
The number of people traveling to Japan has tripled in just a decade
Sources: Japan National Tourism Organization; JTB (2024 estimate)
This obsession brings more people to the country. Tourism differentiates the start of the Lost Decades and today, perhaps Japan’s greatest economic success story of the past 30 years. Some 33 million visitors are expected this year, seven times the number of two decades ago. They’re absorbing trends they encounter, further spreading the gospel of its soft power.
When the Weather Finally Breaks
The
Lost Decades were more than an economic downturn. They were also a deep
psychological scar. The nation appeared on the verge of a nervous
breakdown; its body, soul and pride assaulted. It slipped into 30 years
of stereotyping: Japan is so quaint, it never changes; Japan is so
technologically efficient, it is the future; Japan is so stuck in the past,
they still use fax machines; Japan is so mired in myopic habit, it’s as
stale and overworked as those pretty but plastic food displays that
advertise menus. Japan was discussed with a familiar, often lazy shorthand
— a country of identically suited worker drones, frustrated housewives
and sex pests; a faded nation whose people had little agency or
relevance to what was happening in the West. A nice place to visit,
perhaps, but you wouldn’t want to live there. In any case, the
supposedly xenophobic locals would not permit it.
But Japan is not a toy that flips open and shut like a Transformer; neither is it preserved in plastic aspic. It’s certainly not fossilized in tradition. That summer of 2003, I had to look behind the facade to notice what was ailing the place. Today, many of the positive signs of change are also just beneath the surface. The suicide rate is lower now than the US; homelessness has fallen by an incredible 90%. The population might be aging rapidly, but its birth rate looks healthy compared with neighbors such as South Korea or China.
Social Problems on the Wane
Suicides and homelessness in Japan have declined from early-2000s peaks
Source: Japan’s Ministry of Health, Labor and Welfare
Note: Homelessness survey began in 2003, but was not conducted from 2004 to 2006.
In place of suit-and-tie salarymen, coffee shops in upscale neighborhoods are often home to originators of online content or retail traders operating on their laptops. When I came to Tokyo from Osaka in 2011, it was a novelty to see foreigners working at convenience stores or restaurants. Now it’s more unusual to encounter a Japanese staffer at the 7-Eleven. Most major cities are thronged with tourists obsessed with local food and culture. The country’s creators — of shareholder value, or cultural content — are increasingly prized and admired. And Tokyo is gingerly embracing a role as a leader of the democratic West.
When the Nikkei broke its record this year, Japanese celebrations were muted. The locals are aware the recovery is still mostly an urban tale dependent on foreign money. Indeed, there is a reticence about emerging from the Lost Decades. The “found decades” of the future may benefit only the elite few, leading to greater inequality in a country that has eschewed ostentatious wealth in exchange for a broad safety net. Workers might be seeing nominal pay hikes, but real wages are still declining as increases fail to keep pace with inflation. Despite the defeat of deflation, rising prices are anything but popular, while the weak yen so beloved of tourists only emphasizes how much local salaries have stagnated.
What will become of the social compact of the past 30 years, in which dynamism was traded for a social stability that remains the envy of much of the world? Even amid decline, the country managed to retain and maintain its high quality of life: affordable housing, universal healthcare, cheap and nourishing food, unparalleled infrastructure, a commitment to law and order. Is that now at risk?
But that’s why I’ve chosen to stay. This is my third decade in this endlessly fascinating society that — despite Western stereotypes of inscrutability — evolves and transforms, evincing endurance and powers the Japanese themselves often don’t fully appreciate. When I arrived, the always tenacious rainy season in Tokyo didn’t break until early August; it was the second-latest start of summer since records began. But it did break. Thirty years is an immense time for a country to be lost but even the longest and most stultifying of seasons don’t last forever.