Lost Decade economy trophy passes from Japan to Canada

What stories did we tell about Japan's lost decade and do they fit the new lost decades in Canada, the United Kingdom, and elsewhere?

I did my introductory economics training twenty years ago.

Back then, Japan’s Lost Decade of economic progress during the 1990s after its enormous 1980s economic bubble was a featured case study in many textbooks. Their asset price bubble collapsed and real GDP per capita grew just 7% cumulatively from 1991 to 2000, down from 47% in the 1980s.

It was a warning. Avoid whatever Japan did to cause that!

One puzzling change in the global economy since my introductory studies is that there are now many countries to choose from if you want to observe a lost decade of economic progress.

This is especially the case across Australia’s peer nations, with Canada seemingly the worst of all!

Why?

The main story told about Japan’s lost decade was that a post-bubble recession was extended by tight fiscal and monetary settings and an ageing population.

But do these stories fit the current lost decades in Canada and elsewhere that are even worse than Japan’s on per capita GDP terms?

New lost decades

As a reference point, Japan grew 7% in real GDP per capita terms in the decade after 1991. This was widely thought in the early 2000s to be the stand-out example of the sudden stagnation of a large modern economy.

Here’s some data from the World Bank up to 2023 (in local inflation-adjusted currencies) showing that not only has Japan’s growth rate increased since, but Germany and Canada have seen much lower growth in the decade up until 2023.

But it’s worse.

The past year has seen substantial per capita GDP declines, especially in Canada and New Zealand, but also in Australia and the United Kingdom.

Both Australia and the United Kingdom’s 2014-24 decade was identical to Japan’s lost decade in terms of seeing only 7% cumulative GDP per capita growth. New Zealand fared better, but Canada’s real GDP per capita in 2024 is back where it was in 2014.

That’s a decade of zero growth!

In that time the United States has grown 18% in real GDP per capita terms.

If we extend our timeline backwards, we have the astonishing situation whereby Canada’s real GDP per capita grew only 0.55% per year on average for the last twenty years, from the end of 2003 to the end of 2023.

Why?

The main stories I was told twenty years ago about Japan were these:

1. Post-bubble recession

2. Tight monetary or fiscal policy

3. Ageing (and lack of immigration)

But I think there are two other potential stories here too, which are:

4. Covid disruptions

5. Measurement issues

Do any of these stories help explain recent decades in Canada, Australia and their peer nations? Let’s dive in.

Post-bubble recession

The closest example of underperformance following a major bubble might be the United Kingdom. It saw a much larger financial crisis recession, and although there was a strong recovery period up until COVID, real GDP per capita is only 5% higher than the 2008 pre-recession peak.

That’s nearly 16 years with less cumulative per capita economic growth than Japan’s lost 10 years in the 1990s.

Recently, some groups have claimed that regulations going back to the post war period that prevent energy and housing investment are the main issue with the United Kingdom’s economic malaise.

I find that hard to believe. Here’s why.