In this paper, I have tried to explain the cause of the lost decade of Japan as a difficulty of transition from the traditional Japanese governance system to a new one. This difficulty was compounded by a series of policy mistakes of creating a deflationary environment. The Japanese economy is stuck with a corporate sector without a traditional governance structure, coupled with a loss-making banking and insurance sector and rapidly increasing national debt. Moreover, a number of companies with negative equity are able to continue to operate because of extremely low interest rates, since the banks with little or no capital do not want to foreclose on these companies aggressively because it may trigger their own bankruptcy. If the current pace of deflation and zero-interest rate policy are maintained, the Government is likely to have to subsidise the banking sector by 3-4 trillion yen a year indefinitely. In other words, the Government has to effectively nationalise most banks. Moreover, sooner or later, most life-insurance companies have to go to the bankruptcy court to obtain debt relief because they have promised a very high return on their long-term insurance policy without matching long-term high-yielding assets.
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