Why Capitalism Stopped Working In Japan, with Takeo Hoshi

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Oct 2, 2025

In this engaging discussion, Takeo Hoshi, a professor at the University of Tokyo and expert on Japan's economics, dives into the nation's 'lost decades' following the 1990s bubble burst. He explains how deflation entrenched financial stagnation and the banking system's failures compounded the crisis. Hoshi also highlights Japan's global economic significance, examining its heavy export reliance and the implications of its high public debt. The conversation explores lessons for other advanced economies grappling with similar challenges today.

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INSIGHT

Policy Failure Fueled The Lost Decades

Japan's long stagnation reflects policy failures after the 1990s, not an inevitable macro collapse.
Forbearance on bank non-performing loans prolonged recession by keeping inefficient firms alive.

ADVICE

Resolve Bank Crises Quickly

Clean up bank balance sheets quickly after a bubble bursts to avoid prolonged stagnation.
Restructure non-performing firms instead of propping them up to prevent zombie firms and protect employment sustainably.

INSIGHT

Productivity Drop Hidden By Work Patterns

Measured productivity fell when using GDP per hour because Japan increased part-time work and reduced full-time hours.
Aggregate-hours measures mask declines in per-worker productivity growth since 1995.

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The Japanese economy was once the envy of the world. By the 1980s, it looked set to surpass the United States in size. Real estate prices were high, the stock market was booming—the entire world was asking if Japan had found a superior model of economic growth and recovery after World War II, one grounded in industrial policy.

However, the bubble burst in the early 1990s, and what followed was not a quick recession and rebound as we have often seen in the U.S., but decades of stagnation. Near-zero deflation became entrenched, and the banking system turned into a drug of cheap borrowing rather than an engine for recovery, with the Bank of Japan pioneering quantitative easing by pushing interest rates to zero long before the U.S. Federal Reserve considered such steps in the wake of the 2007 financial crisis. Japan has never since returned to sustainable growth, and this matters for the world at large. A significant creditor to other countries, shifts in Japan’s economic policy and fluctuations in its currency ripple across global interest rates, tightening or loosening financial conditions worldwide. Japan also remains a critical node in global supply chains (including for semiconductor chips and electronics), a major importer of energy, and not for nothing, its cultural exports continue to conquer the world.

What lessons can Japan’s lost decades of economic stagnation and missed opportunities offer the U.S. and other developed economies? Bethany and Luigi are joined by Takeo Hoshi, professor of economics at the University of Tokyo and a leading expert on Japan's financial system and economic stagnation. Together, they discuss Japan’s idiosyncrasies—from demographic decline to economic policy mismanagement—and the interplay of global factors such as populism, nativism, and dissatisfaction with capitalism. If the U.S. is indeed on the cusp of its own economic bubble driven by oversized capital investments in artificial intelligence and technology rather than consumer spending and wage growth, does it have the institutions and flexibility to avoid Japan’s fate?

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