What Americans Should Understand About Japan's 1990s Economic Bust

Hiroki Iwabuchi is slouched over a bowl of noodles in his pool-table-size apartment, peering at the camera that’s filming him. He slurps absently for awhile, and then a friend joins him—he’s come to cut Iwabuchi’s hair. It’s hard for anyone to look natural during a haircut, but Iwabuchi barely seems alive. Squatting over a pile of newspapers, shirtless under a trash-bag smock, he doesn’t look tired so much as defeated, like a dog that has given up on being adopted.

In 2006, at the time of the filming, Iwabuchi was 23. Unable to find a regular job after college, he had signed on with a temp agency that sent him to a Canon factory two hours outside Tokyo. His workweek went as follows: ride company-owned bicycle to factory for 8 o’clock start time (a.m. or p.m., depending on the day), place lids on ink-jet printer cartridges for nine hours, return to Lilliputian company apartment, eat ramen, repeat four times. According to Iwabuchi, his wages weren’t high enough to live on, so he had to find other work to make ends meet.

Every weekend, he took the train to Tokyo to perform manual labor at whatever odd job a second temp agency texted to his phone. He earned enough to buy dinner at McDonald’s and pay the $10 fee to sleep in a chair at an Internet café. By Sunday night, he had just enough money left for train fare back to his apartment.

Iwabuchi documented his life on a cheap Sony camcorder, cobbling the footage into Freeter’s Distress. The film was not terribly popular: 2007 Japan was in no mood to wallow. The economy was the best it had been since the country’s titanic real-estate bubble burst in 1990. Growth, employment, and real-estate prices were all picking up. Japan’s central bank had recently raised interest rates above zero for the first time in almost six years.

So Iwabuchi’s film was an unwelcome comedown. It reminded viewers that millions of young people displaced after the bubble burst still lived in poverty and, more controversially, that this was not a lifestyle choice. Freeter translates roughly to “slacker”—the popular myth at the time was that young people like Iwabuchi were just lazy.

Today, there is no doubt that Japanese youth are in distress. Although the green shoots of the mid-aughts didn’t exactly wither, neither did they blossom into a full-blown recovery. Like bonsai, the economic gains stayed small—until they were obliterated by the global financial crisis of 2008 and 2009. In a report released last year, the government’s principal labor economist openly fretted about the lack of opportunity for young Japanese today, and what that means for the nation’s future.

While Japan struggles to escape from economic permafunk, America’s economy seems to be getting better. Many Americans today have a sense that the worst is behind us and that, if this recovery is anything like those of the ’80s, ’90s, and early 2000s, the next few years could be good ones.

But we should spare a thought for our friends across the Pacific—not just for their sake but for ours as well. No one knows why Japan’s economy never fully recovered, but some economists are starting to trace the problem to young people like Iwabuchi who cannot find good jobs, don’t learn new skills, and neither earn nor spend enough to help get the economy moving. That generational problem, while far more advanced in Japan, is not unlike our own.

When Japan’s real-estate bubble burst, young people had no point of reference other than boom times. So when the job market dried up, many of them welcomed the chance for self-exploration. In 1990, the Los Angeles Times reported on these young freeters, who rejected “conformist Japanese culture and its 15-hour workdays” in favor of “working odd jobs for spare cash” and “hanging out.” The freeters pioneered funemployment.

But while the term freeter stuck, the choice to be out of work was soon anything but free. The first freeters are now in their late 30s and early 40s. Almost one-third do not hold regular jobs, and some never have. One-fifth still live with their parents. This perpetual failure to launch has taken a psychological toll. Aging freeters file six of every 10 mental-health insurance claims. Japan’s suicide rate rose by 70 percent from 1991 to 2003, and the proportion of suicide victims in their 30s has grown each of the past 15 years.

What is most alarming is that things keep getting worse for subsequent generations. Today, more than 20 years after Japan’s bubble burst, youth unemployment is higher than ever. Only half of working 15-to-24-year-olds have regular jobs, and another 10 percent are unemployed. The rest are “nonregulars.” Somewhat akin to temp positions in the U.S., Japan’s nonregular jobs pay half as much as regular jobs, offer few benefits, and can be eliminated on a whim—which they often are. The portion of young Japanese working as nonregulars exploded in the mid-1990s and has marched upward ever since.

After years of profit pressure, Japanese companies have all but stopped hiring regular employees, and most young job-seekers must choose between an unstable job and no job at all. The companies claim they are just reacting to the weak economy: sinking profits call for cost control, and nonregulars are both cheap to employ and easy to fire.

But why has Japan’s economy been so lousy for so long? One possibility is that economic stagnation and job insecurity feed on each other—that the sorry state of workers who graduated into Japan’s recession in the early 1990s has hindered growth and, in turn, dimmed job prospects for today’s graduates. Perhaps precarious youth employment is both a symptom and an agent of economic decline.

Chronic job instability has serious consequences. Most obviously, financially insecure young adults do not make for mighty consumers; many members of Japan’s rising generation of workers can barely afford to rent an apartment, for instance, never mind buy a house. But job instability also impedes professional growth and wastes human potential, and in the long run, these can be more-ruinous developments. Over the past 20 years, as the share of nonregulars in the Japanese workforce has nearly doubled, Japan’s productivity has barely improved. A growing body of research links these two developments.

Naoki Shinada, an economist at the Development Bank of Japan, explains that in the immediate aftermath of an economic shock, it makes sense for companies to use temporary and part-time workers to control costs and maintain flexibility. But problems arise when this becomes the standard hiring practice, making it “more difficult for firms to maintain some skills embodied in their labor force.”

Companies’ neglect of their workers’ skills would seem to be self-defeating, but something economists call “lumpy adjustment” could explain the phenomenon. David Autor, an economist at MIT, says many economic actors (in this case, corporations) “don’t make lots of little reorganizations each time things get slightly out of true.” Instead, they “wait until things are way off, then make one big adjustment. A deep recession is one setting where things might go from slightly out of true to way off, thus causing a major reorganization.”

When business fell off a cliff in the early 1990s, Japanese companies rushed to cut costs, shuttering training programs and limiting campus recruiting. And as growth prospects remained uncertain, they began to fill the gaps that emerged in their workforce with temporary or part-time workers. Over time, this shift surely spurred other, compensatory changes—narrower job scopes with less personal latitude, a different style of management, a slow transformation in corporate culture. Now that the old practices are gone, it would take a huge surge in demand, and a severe shortage of skilled talent to meet that demand, to get companies to reinstate training and recruiting infrastructure, and to reorient their culture and management practices. Japan has had no such surge.

The retired CEO of a major Japanese technology company told me, “Companies changed hiring practices in the 1990s, and the days of a company hiring a few hundred or a thousand graduates and training them are gone. Companies are looking for a few elite students who can be leaders. The appetite in terms of quantity isn’t there anymore.” If you are not an elite student, in other words, don’t expect a regular job or job training.

For each company, at each step, these changes in hiring and management must have appeared sensible. But of course they were myopic, and collectively disastrous. Kyoji Fukao, an economist at Hitotsubashi University who has studied the relationship between unstable employment and economic growth, is a scathing critic of Japanese employers who skimp on training. “Individual companies might increase profits in the short term by hiring nonregular workers, but this slows the accumulation of human capital in the overall economy and inhibits growth,” he told me. In a 2011 report on Japan’s labor market, the OECD economists Randall Jones and Satoshi Urasawa concurred, writing, “Nonregular workers receive less firm-provided training and accumulate less human capital, lowering their productivity and Japan’s growth prospects.”

Fukao has calculated that the shift toward part-time workers in the 1990s alone reduced Japan’s human capital—its collective store of workforce knowledge and competencies—by 2 percent. This may not sound like much, but modern economies run on human capital, and any decline in this precious resource has an outsize impact on growth.

In 1992, 80 percent of young Japanese workers had regular jobs. By 2006, half were temps. (Over the same period, the portion of young Americans working as temps stayed put at one-third.) Only 2 percent of nonregular workers transition to regular work each year in Japan. Most of today’s young temps will probably never hold regular jobs.

We do not know for certain that Japan’s lost generations, once a symptom of economic decline, now perpetuate that country’s malaise; the evidence for a feedback loop is only circumstantial. But the marked deterioration in Japan’s job market began in 1993. It is perhaps not a coincidence that Japan’s economy today is smaller than it was in 1992.

Japan’s example raises the stakes for America as it struggles to contain the Great Recession’s damage. Even if it rains jobs tomorrow, America’s current bout of high unemployment is already the longest in its postwar history. And youth unemployment is twice the national average. Japan’s experience highlights the risk that this generation may end up so utterly lost, it will set off a cycle of economic decline—one that quashes the chances of generations to come.

America is not destined to repeat Japan’s fate. For starters, Japan’s real-estate bubble was much larger than America’s. And its demographics are far worse; a shrinking population has undermined economic growth both arithmetically and psychologically. Making matters worse, Japan’s conformist culture ostracizes displaced workers. Any gap on a candidate’s résumé is viewed with deep suspicion, so temporary job loss in many cases leads to chronic unemployment.

But unemployed workers in the United States are also stigmatized. And the U.S. workforce will grow more slowly over the next 20 years than it has at any time in the past century. American companies, meanwhile, have shifted toward more part-time work since the crash of 2008, just as Japanese firms did in the early 1990s; 30 percent of America’s workers ages 20 to 24 were part-time in 2012, up from 23 percent in early 2008.

Japan’s example is particularly instructive because it is so recent. Workers today face a unique set of challenges, mostly related to globalization and technology, and Japan shows what a bad combination it can be when these structural headwinds collide with a severe economic downturn. It is hard enough to stay relevant in today’s workplace even with the benefit of a regular job. Young workers who fail to secure steady work are left in a lurch.

To succeed against these odds, young workers must be tenacious and adaptable, figuring out what skills are in demand and how to get them. But companies must also have the confidence to hire. This confidence grows out of a genuine belief that tomorrow will be better, and while stimulus can help, the smooth performance of basic government functions, such as the passing of budgets, is prerequisite.

When the private sector does not generate enough skilled jobs, family and government should step into the breach. Parents must stress the importance of getting on the skill escalator early, and may have to subsidize continuing education or facilitate other job training for their children. And, in the absence of all else, government-run training programs are better than nothing. (That’s how Iwabuchi landed his current job; some seven years after he made his movie, he is now a full-time nursing-home orderly.)

The whole country should join in bolstering this generation—and the next. Modern economies rest upon the skills of their workforces, and so, although it is expensive and time-consuming to train young workers, wasting their potential will prove more expensive.

In this respect, Japan’s lesson is clear: We must prevent a lost generation by any means necessary. Because it’s hard to stop at just one.