Japan’s Bubble-Burst: Why Sweden Recovered and Japan Didn’t

Disclaimer: This article reflects my personal experiences as someone born in Japan and raised in Sweden. Some facts may be skewed, but the point is not to offer a perfect historical account. Rather, I aim to share lessons Japan can draw from Sweden’s economic journey, informed by what I learned in school, my career experiences in both countries, and my observations of their economies.

Imagine a nation swept up in a frenzy, where families rushed to buy homes, convinced property was the safest bet around. Young couples took on towering mortgages, retirees drained pensions to invest in “sure-thing” real estate, and banks handed out loans as if prosperity were endless.

Then, it all collapsed…

Housing prices plunged by nearly 30%, in a year, wiping out life savings, leaving neighborhoods silent, and banks on the brink of bankruptcy…

Yes, I’m talking about Sweden in the early ’90s.

The burst of Japan’s economic bubble in the ’90s is one of the most discussed events in financial history, and I should know, having made a YouTube video on it that reached half a million views:

But why is Japan’s bubble-burst so much more notorious than other economic crises that were equally devastating?

The answer is simple: Japan never truly recovered.

Which raises the question: How did Sweden, a country that faced an equally brutal crisis in the early ’90s, one that nearly bankrupted the entire nation, manage to rise from the ashes to become one of the world’s wealthiest countries, while Japan remained stuck?

First, a background of Sweden's bubble-burst:

In the late ’80s, Sweden was riding high. Fueled by easy credit, deregulated banks, and skyrocketing asset prices, the country saw rapid growth and the same insane euphoria Japan experienced. Houses, stocks, and real estate were snapped up in a frenzy; everyone from business executives to retirees were confident in the strength of the market. Prices rose, optimism soared, and the good times felt unstoppable.

Then came the crash, and with it, one of the darkest economic crises Sweden had ever faced. By 1992, property values plummeted, wiping out up to 30% of housing prices almost overnight. Debt-laden families found themselves drowning as loans became impossible to repay.

As in Japan, asset prices had ballooned to unsustainable levels, but where Japan saw a steady decline, Sweden was hit fast and brutally. Unemployment spiked sharply. At the end of 1992, the Swedish unemployment rate shot up to a record 13% from less than 2% the previous year! On top of that, the entire banking sector was at risk of collapse.

The real shock came when Sweden’s central bank stepped in to stop the freefall, raising interest rates to an unprecedented 500% to prop up the currency and stem the crisis.

Imagine: a so-called “first world” nation, forced to raise rates to 500%, a number so staggering, even failed governments like Venezuela wouldn’t dream of such heights.

Translation: “500% in interest rate. Panic in speculation of Swedish devaluation

However, here’s where Sweden’s story takes a sharp, decisive turn from Japan’s.

Yes, Sweden’s economic situation was disastrous. Deficits above 12% of GDP, three years of negative growth, and unemployment soaring.

The existing right-wing government collapsed, making way for the Social Democrats under Göran Persson.

The right wing government (leader Carl Bildt on the left) got kicked out of power, which gave a big mandate for the Swedish social democrats to clean things up (Göran Persson on the right)

Known for his no-nonsense approach, Persson, as Finance Minister and later Prime Minister, declared it was time to “clean up” the mess. And he meant it. Persson’s austerity was sweeping: no area of spending was immune, with drastic cuts to healthcare, welfare, and government agencies. He even reformed Sweden’s pensions system, something many governments avoid as politically suicidal​.

While Japan was busy propping up the very banks and companies that were the cause if its economic downfall, Persson took a different approach: Let them fail!

In a particularly dramatic move, the government allowed two of Sweden’s largest banks, Nordbanken and Gota Bank to collapse, restructuring them only to eventually merge and form Nordea.

In his words, “This is for real. If you mismanage this, it will end in disaster.”

Göran Persson caught stealing candy from a candy store in Stockholm

The Swedes suffered more than any other time since WWII, but these ruthless measures brought Sweden’s deficit to near-zero within four years, laying a foundation that Japan never achieved….

Sweden's debt-to-GDP ratio has steadily declined since 1993, as shown by the red (actual) and blue (adjusted) lines

Persson’s approach was politically costly. His party faced public backlash, resulting in some of the worst election results in 70 years. But he pushed on, emphasizing that “this isn’t an economic issue, it’s a political one.” By the late 90s, Sweden’s economy had stabilized, and growth had returned. Persson’s austerity was painful, but it gave Sweden long-term stability, a harsh contrast to Japan’s decades of stagnation and reluctance to tackle the core issues directly.

What Japan Did Wrong

Japan in the ’90s faced a moment of reckoning, yet its leaders refused to bite the sour apple. After decades of explosive growth, Japan was so blinded by prosperity that it simply couldn’t fathom an end to the good times. Instead of allowing banks and corporations to fail, Japan’s government bailed them out, perpetuating a faltering version of capitalism where failing entities received eternal lifelines.

Those banks, the same ones whose reckless lending fueled the crisis, were rescued from the consequences of their actions, creating an economic purgatory in which “zombie” companies shuffled along, barely alive, but utterly incapable of thriving. This wasn’t capitalism, it was denial in a suit and tie.

In stark contrast to Sweden, which let the weak fall and cleared a path for recovery, Japan couldn’t stomach a sharp rise in unemployment or corporate bankruptcies. Sweden took the pain upfront, trusting that long-term stability would emerge, but Japan clung to the fantasy that if they just held on a bit longer, things would magically return to “normal.” '

What Japan failed to grasp was that the old “normal” was gone; a paradigm shift had occurred, and clinging to the past was only dragging them deeper into economic quicksand.

It has taken Japanese companies over 30 years to regain the economic value they had in 1989 (Nikkei 225’s performance since 1970)

meanwhile, the Swedish stock index, OMX 30, has risen over 2700% since 1980

Sweden slashed social programs, restructured pensions, and scaled back infrastructure spending, recognizing the need to adjust to leaner times. But Japan, consumed by its legacy of prosperity, refused to make similar sacrifices. It poured billions into construction projects, propping up roads and bridges and other public works projects as if laying concrete could somehow bury the debt problem. The government’s vision was blurred by nostalgia for its golden years, too blinded to see that real recovery meant adapting to a changed reality.

Today, Japan’s debt-to-GDP ratio is the largest in the world, standing at over 260%—a staggering figure that makes the debts of other nations look like pocket change. Meanwhile, Sweden, having confronted its crisis head-on, has maintained a debt-to-GDP ratio of around 35%. Think about that: Japan’s debt mountain is so vast that with just a fraction of it, other countries could marble-coat their capitals. And yet, Japan continues to pour money into sustaining an economy on life support rather than biting the bullet and making structural changes.

In contrast to Sweden, Japan’s debt-to-gdp has ballooned since the 1990s, becoming the highest in the world!

One thing really annoys me when talking about Japan…

Japan is often praised for its efficiency, admired by tourists who see clean streets, punctual trains, and pristine infrastructure.

But this image hides a truth built on an unsustainable foundation, a mountain of debt that threatens the very future of the nation!

Sweden’s example demonstrates that real, sustainable prosperity is achieved by facing hard truths, by allowing inefficiencies to die out, and by creating a government that’s willing to endure public criticism for the sake of long-term stability.

Now, I can already hear you say, “Sweden is nowhere near perfect. They have massive issues! Gang violence, immigration problems that just seem to be getting worse.” And yes, you’re absolutely right. Sweden does face significant challenges.

But here’s the key difference: the Swedish government is healthy. Thanks to its effective handling of past financial crises and sound current policies, Sweden has the resources to tackle its issues head-on, clean them up, and make things better.

Japan, on the other hand, doesn’t have that luxury. Decades of mismanagement and a habit of kicking the can down the road have built up a debt mountain so high that any substantial reform becomes nearly impossible. In fact, if the Japanese government were to attempt sweeping structural reforms to correct past wrongs, they could risk bankrupting the entire nation.

Japan is finally taking steps toward real reform and addressing its financial woes, evidenced by companies beginning to churn out increased profits. Yet, with the world's highest mountain of debt and a population so old that the nation risks fading into history by the century's end without drastic action, one question looms larger than ever:

Is it already too late?