My understanding of the main causes for the decline in Japan’s growth rate can be summed up in the following three points. The first cause can be attributed directly to the burst of the bubble. During the formation of the bubble, driven by excess optimism about the future, firms expanded their business capacity and employment, and increased their debt.
After the eventual bursting of the bubble, the so-called “three excesses” remained, namely excesses in business capacity, employment, and debt. The economy continues to suffer downward pressure as long as “such excesses” remain. It was not before the resolution of these “three excesses” in 2003 that Japan returned to a full-fledged recovery path (Slide 8).