What ever happened to Japan? Once poised to pass the U.S. as the world's economic superpower, Japan is now suffering from a two-decade-long slump that shows no sign of ending.

• Author: Fackler, Martin
• Position: INTERNATIONAL

Kento Nosaka, a 17-year-old high school junior in Sapporo, is like many Japanese these days. He steers clear of expensive brand names, shopping instead at the popular Japanese clothing retailer Uniqlo. He rents movies rather than seeing them in theaters. And he streams music from free online radio stations instead of paying for downloads.

"The economy is in decline," says Kento. "People are spending less money, they don't go to foreign countries, they don't buy expensive things like houses and cars."

Few nations in recent history have seen such a striking reversal of economic fortune as Japan has in the last two decades.

Following the devastation it suffered in World War II--when the U.S. dropped atomic bombs on Hiroshima and Nagasaki to end the war in 1945--Japan's economy exploded. From the 1950s to the 90s, economists marveled at the "great postwar economic miracle" and Japan became the first Asian country to challenge the long dominance of the West. It built a manufacturing empire, with brands like Sony, Toyota, and Nissan turning out innovative electronics and cars year after year that Americans and Europeans couldn't live without and couldn't seem to build themselves.

In the 1980s, Japan's growing middle class lived large, flying by the planeload on flashy shopping trips to Paris and snapping up luxury condominiums in New York and Hawaii. While today the U.S. is concerned about the challenge from China, 20 years ago it was Japan that had Americans nervous. Economists predicted that Japan would replace the U.S. as the world's largest economy by 2010.

Disappearing Jobs

But nothing like that has happened. In the late 1980s, Japan's real estate and stock market bubbles burst, and its economy went into a slow but relentless decline. For a generation now, Japan has been plagued by "deflation"--a decrease in the prices of goods and services (see sidebar, p. 15). Because of fewer available jobs and lower salaries, Japanese are holding on to their cash instead of spending it, causing the economy to slump further.

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A real frugality has developed among a generation of young Japanese, who have never known anything but economic stagnation and deflation. Struggling companies looking for ways to cut costs are offering recent graduates only temp work, low pay, no job security, and little on-the-job training--if they're hiring at all.

"Most college students cannot find a job," says Kento, so they take jobs in restaurants, convenience stores, or as telemarketers.

Another factor that has kept Japan's economy from rebounding is its demographics. Japan's life expectancy, 83, is among the world's highest, and its birth rate, 1.4 per woman, is among the lowest.

The result: Japan has the oldest population on earth (30 percent of Japanese are over 65, compared with 13 percent of Americans) and a shrinking population and workforce, which will mean lower productivity and weaker demand over time.

'Survival Generation'

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