News relating to the behaviour of Japan’s economy and financial markets is nowadays rarely in the headlines of the world’s media. This, however, wasn’t always the case. On the contrary, Japanese economic and financial developments have in the past often captured the world’s attention – and for good reason. Indeed, how Japan’s economy has evolved since the end of World War Two constitutes an exceptionally fascinating story – and one which should be of enduring interest to economists, not least because of wider lessons it offers, particularly for the conduct of policy.

Like Germany, Japan recovered spectacularly from its defeat in the Second World War; and experienced its own Wirtschaftswunder. Indeed, between 1955 and 1970 Japan’s GDP growth averaged 10% per annum. Such impressive export-led growth (aided by a hefty dose of state intervention) furnished an alluring development model to the rest of Asia, with the region’s “Tigers” subsequently embarking upon similar export-driven and stellar growth paths. Japan subsequently weathered the oil price shocks of the 1970s relatively well to emerge in the 1980s as a high-performing economy characterised by exceptional levels of innovation and inventiveness.

Indeed, by the late 1980s Japan seemed to have everything going its way: a fast-growing economy; a booming stock and property market; a fast-expanding portfolio of overseas assets.  The Harvard Business Review – then as now the arbiter of business “best practice” – increasingly lauded Japan’s business model. And there was growing talk of the inevitability of Japan overtaking the US to become the world’s largest economy in the not-too-distant future.

Unfortunately, though, Japan’s strikingly robust economic and financial boom was built on increasingly rocky foundations. The super-optimistic corporate sector was investing increasingly beyond its means (indeed, in 1990 the corporate “financing gap” equalled almost 10% of GDP); households, feeling increasingly well-off, were reducing their (previously very high) savings ratio; Japan’s banking system was rapidly expanding its lending in gung-ho fashion, relying upon the fast-appreciating domestic property market for collateral.

Inevitably, though, this bubble burst – eventually fatally punctured by the Bank of Japan belatedly hiking rates to take the wind out of runaway asset prices. And the subsequent decade experienced a traumatic unwinding of past excesses. The heavily over-geared corporate sector sought to reduce its onerous debt-load by running a chronic financial surplus, consumers grew more cautious as the unemployment rate climbed upwards; the banking system, burdened with soured corporate and property debt, ceased to lend. Indeed, the economic performance of Japan during the 1992-2001 period – the so-called “lost decade” – was extraordinarily poor, contrasting starkly with the prior “economic miracle”. During this ten-year period GDP growth averaged less than 1% per annum, there were three outright recessions (1992/3; 1997/98 and 2000/01) and consumer price deflation turned consistently negative – a 1930s-style “bad” deflation.

This “lost decade” story is nowadays part of financial market folklore. What is less widely recognised is the progress the Japanese economy has made from 2002 onwards. Indeed, over the 2002-08 period the economy enjoyed its most extended post-war expansionary cycle and corporate profits reached a new high as a proportion of GDP. Crucially, large-scale banking reform was forced through by a pro-active government. And the economy came close to exiting both consumer price and property deflation. Admittedly, a renewed export boom – fuelled largely by China’s post-WTO entry exceptionally rapid industrialisation – played the key “heavy lifting” role but, significantly, domestic demand was consistently supportive.

This impressive renaissance was wholly derailed by the adverse shock imparted US economic and financial meltdown in 2008 – the “Lehman shokku”, as it became known in Japan. And post-GFC economic recovery, as elsewhere, was slow while price deflation took a renewed hold. Eventually, the frustration imparted by sub-par economic performance gave rise to Abenomics, a decisive regime shift designed to boost Japan’s economic fortunes via “three arrows”: fiscal and monetary stimulus (the latter including a sharply lower exchange rate) and a marked stepping up of deregulation.

Opinions differ as to whether “Abenomics” worked. Significantly, though, post-pandemic Japan has experienced positive price inflation while, crucially, positive inflationary expectations are looking increasingly well entrenched. And the Bank of Japan – the pioneer of post-WW2 Quantitative Easing and negative policy rates – is now pursuing the path of interest rate “normalisation” with all that may imply for the Yen “carry trade”.

All this (and much more) of the story of Japan’s extraordinary economic and financial evolution is told – in fascinating and authoritative detail – by Russell Jones in his latest book, “A Modern Economic History of Japan”.

Credentials-wise, Jones speaks with impressively extensive experience having worked in financial markets as a “Japan watcher” from the late 1980s onwards, and spending most of the 1990s in situ in Tokyo. He thus enjoyed what he describes as a “ringside seat” as Japan’s bubble economy peaked and subsequently imploded. In subsequent career incarnations involving wider coverage he kept a close eye on what was happening in Japan.

Jones’ approach to his subject matter is straightforward: that of historical narrative, with an emphasis upon economic and financial developments and macroeconomic policy making. Importantly, his narrative is an adroitly executed exercise – beginning with the commencement of Japan’s modernisation with the Meiji Restoration of 1868 but with the bulk of the book focused upon the past forty years beginning the development of the bubble economy in the late 1980s.

I do think that Jones may have missed a trick insofar as he doesn’t assess the influence of Japan’s “fall from grace” in the early 1990s upon the thinking of policy makers elsewhere. I say this because what went wrong in Japan at that time generated much interest in academic and policy making circles overseas, particularly in the US. And, crucially, this paid dividends in the future insofar as the pro-active policy response of US policy makers to the Global Financial Crisis was informed not just by knowledge of what gone wrong in the US in the early 1930s but, also, by a painful awareness of what Japanese policy makers had signally failed to do during the “lost decade” ( eg mend the banking system) to restore their economy’s fortunes. Indeed, future Fed chair Bernanke spent much of his time as a Princeton academic (before arriving in Washington as a Fed Governor in 2002) analysing what had gone wrong in Japan – and, importantly, what should be done to put things right. But Jones may have felt that exploring this avenue was beyond his remit.

In conclusion, I would unhesitatingly recommend this book. If you don’t know much about Japan’s recent macroeconomic history, reading this book will be an easy way to learn what matters most. And even those for whom this story is familiar will enjoy Jones’ well-structured and highly readable narrative and benefit from his manifold insights.