Over the past 70 years, the Japanese economy has been a sort of spectacular meteorite among advanced economies. In many respects it has exemplified the highs, and now the relative lows, of economic performance in the rich world. In the 1950s it was the poster child of a rapidly growing economy that benefited from having its defence paid for by the US and its exchange rate undervalued within the Bretton Woods fixed-parity exchange rate regime. Japanese economic success mirrored the post-war West German economic miracle. It was distinguished by strong growth, huge export success and technological innovation in cars, motorbikes and electronics that swept away foreign competitors. Japan built up a massive balance of payments surplus.

But the country was also on the rise outside its own borders. In the 1970s and 1980s, its manufacturing industries helped put the rust into the US rust belt and decimate European competition. According to the St Louis Fed, imports from Japan into the US “increased sixteen-fold between 1970 and 1989. The import value of $94bn in 1989 was the largest from any single country and was equal to 93% of the total from all of Western Europe.” US strategic power was perceived to be undergoing a profound decline.

In Europe, Japanese investors bought prized iconic assets – from the Mozart Café in Vienna to the Financial Times’s Bracken House building in the City of London. These acquisitions were contentious, particularly in continental Europe. Part of the rationale for the construction of the single market and the single currency was the perceived need to build a fortress Europe to protect Europeans from the menace of Japanese and other competition. This imperative was given its fullest expression by the Socialist French prime minister at the time, Edith Cresson, who described the Japanese as ants. She claimed this was to convey the impossibility of Europeans matching their work effort and productivity.

Over two years, this engineered a 50% fall in the value of the dollar to the yen. The agreement arose from the pressure by US manufacturers to make imported Japanese goods less competitive. US policy makers hoped this would narrow the US trade deficit with Japan. It failed in that objective, but it helped to make American products more competitive and had a profound effect on Japanese policy.

The result was an equity and real estate bubble that grew from 1986 to 1991, which was when the equity market bubble popped. That is now considered to be the starting point of a lost decade that might be more accurately called the lost decades. What burst the bubble? The Bank of Japan began raising interest rates in 1990 because of anxiety about inflated asset prices. The money supply and commercial and retail credit indicators had expanded by double digits for several years until then. In 1991, land and stock prices began to fall sharply. Within a few years, from its peak the Topix stock index fell 54%, while commercial land prices in six main Japanese cities fell 95%.

The stock market to a large degree followed movements in the prices of commercial real estate. Those were driven by the interaction of bank lending and an inelastic supply of land. When banks’ perception of risk changed, credit expansion collapsed and lending and asset values fell. Lower house prices had a profound negative impact on consumers’ confidence, which was aggravated by a fall in real personal disposable income.

The bursting of the Japanese asset price bubble and the collapse of the miracle economy presented a puzzling spectacle to international investors and policy makers alike. In the 1990s, the Japanese government had to suffer a succession of homilies about how it could do things better, both in its own interest and that of the rest of the world. These usually involved advocating a stronger domestic economy, domestic structural supply side reforms and a higher exchange rate. The Annual Economic Report of the US Council of Economic Advisers offered regular policy advice to Japan.

Over some 10 or 15 years, Japanese macroeconomic policy appeared to boil down to permanent fiscal stimulus matched by a highly accommodative monetary policy, an expansion of the central bank balance sheet and the huge accumulation of public debt in relation to national income. Eventually, in its own way, and in its own time, Japan ended up doing all the things the international policy-making community led by the US Treasury had asked it to do. But two and a half decades after the bubble burst, its recovery was not much further forward.

When Prime Minister Shinzo Abe launched an energetic programme of stimulus in 2012, to shake Japan out of its torpor, the world was watching. ‘Abenomics’ was consciously modelled on the Reagan supply side reforms, which used deficits and micro-economic shifts to boost the markets. Abenomics had three dimensions – the so-called three arrows: fiscal stimulus, monetary stimulus and economic reform.

In the context of an ageing demography and falling population, Abenomics has been relatively successful in stabilising and stimulating output. On the critical metric of real GDP per head, which is the key to economic welfare, Japan continues to do well. What Japan has is a rich and slowly growing GDP per head. That is surely more comfortable than an erratic economic cycle of booms and busts, and stagnant GDP per head overall. In that sense, Japan offers lessons and hope to other advanced economies learning to cope with slow overall growth and ageing communities.

The lessons are likely to be needed. Nearly a decade on, and before the present economic shock created by the Covid-19 public health emergency, the Japanese experience looks universal. Central banks tried both conventional and unconventional monetary tools but could not stimulate economic activity. Very low interest rates across the G7 and OECD have created many examples of zombie firms. Governments were hesitant to use fiscal policy and when they did so, as in the case of the Obama administration, they lacked ambition in terms of the scale of the programmes.

The Japanese experience illustrates the way in which economies may enter a form of balance sheet recession or stagnation after an asset price collapse and banking crisis. They move from an environment where economic agents are profit-maximising entities to one where their principal concern is to minimise risk and the danger from debt.