How many (more) lost decades? The great productivity slowdown in Japan

I document that, relative to the period 1971 to 1990, Japan has suffered almost three complete “lost” decades of slower growth from 1991 through 2018. The average growth rate of output per working age person, and of labor productivity–measured by both output per hour worked and output per employed person–substantially declined in the 1990s and never returned to pre-1991 values. The average growth rate of output per working age person from 2011–2018 partially recovered, to just 56 percent of its 1980s value. I find this partial recovery was due solely to an increase in hours worked per working age person–labor input growth–which cannot support sustained growth in living standards. By contrast, labor productivity growth–which can support sustained growth in living standards–declined further in the 2010s and averaged just 20 percent of its 1980s value. Growth accounting shows that a large and persistent decline in total factor productivity (TFP) growth was the source of Japan’s slowing labor productivity growth in the 1990s and 2000s, while a falling capital output ratio forced further slowing in the 2010s. Assuming a global trend growth rate of 2 percent per year, the average growth rate of output per working age person in the 20th century United States–commonly viewed as the technology-frontier country, I show that Japan’s TFP collapsed relative to trend in 1992 and has deviated increasingly below it. By contrast, since 1991, US TFP has fallen relative to trend only since 2016. Among the twenty richest OECD countries, in the post-2000 era–widely argued to have witnessed a widespread advanced economy productivity growth slowdown–Japan’s TFP factor was one of only seven to fall more than 15 percent below trend. Japan’s TFP collapse in 1992, and that of several OECD countries after 2000, is due not to slower US-TFP trend growth but to domestic institutions, polices, and practices that have reduced the efficiency of frontier-technology use. Policy reforms that directly address productivity deficits are needed to support faster growth in living standards that is also sustainable.