Reuters

FOR many Japanese the boom years are still seared on their memories. They recall the embarrassing prices paid for works by Van Gogh and Renoir; the trophy properties in Manhattan; the crazy working hours and the rush to get to the overcrowded ski resorts at the weekend, only to waste hours queuing at the lifts.

The bust, when it came, was less perceptible. The world did not come crashing down after December 29th 1989, the last trading day of that decade, when the stockmarket peaked. The next year Japanese buyers were still paying record prices for Impressionist art at Christie's. It was not until 1991 that the property bubble burst. There was no Lehman-style collapse or Bernie Madoff-type fraud to hammer home the full extent of the hubris.

But once the Nikkei 225 hit 38,916 points 20 years ago this week, life began to leach out of the Japanese economy. In the third quarter of 2009 nominal GDP—though still vast by global standards—sank below its level in 1992, reinforcing the impression of not one but two lost decades. Deflation is back in the headlines. On December 29th the Nikkei stood at 10,638, 73% below its peak, though an expansionary budget drafted on December 25th has given it a recent lift. Urban property prices have fallen by almost two-thirds. Some ski apartments are worth just one-tenth of what the “bubble generation” paid for them.

What effect has this steady erosion of value had on the psychology of Japanese people? The bust did not lay waste to Japan, after all, as the Depression did to America in the 1930s. Homelessness and suicide have risen, and life has got much harder for young people seeking good jobs. But Japan still has ¥1,500 trillion ($16.3 trillion) of savings, its exporters are world-class, and many of its citizens dress, shop and eat lavishly. As a senior civil servant puts it: “Japanese people have never really felt that they are in crisis, even though the economy is slowly withering away.”

For individuals the damage lies below the surface. One of the first bubbles to pop, says Peter Tasker of Arcus Research, who has written several books on the bust, was a psychological one: confidence. Instead of getting angry, people lost faith in Japan's economic prowess. “It became all about declining expectations and how society coped with it,” Mr Tasker says.

The mood among investors swiftly turned risk-averse. Remarkably, retail investors were among the first to get out of the stockmarket and were net sellers of equities from 1991 to 2007, says Kathy Matsui, chief strategist for Goldman Sachs in Japan. Though there have been four bear-market share-price rallies since 1989, they have all been driven by foreigners.

The Japanese parked their money instead in government-backed shelters such as the post office, which in turn invested in safe bonds. The result has been a 78% rally in ten-year government bonds since their trough in 1990 (see chart). “Fixed income has been one of the longest-duration bull markets in the world,” Ms Matsui notes.

A deflationary mindset started to take hold. With prices falling, even inert money in the bank or post office earned, in real terms, a small tax-free return. Once the banking system began to look frail, there was a boom in the sale of safes for people to keep their cash at home. A long period of zero interest rates led a few to hunt for higher yields abroad. The mythical figure of Mrs Watanabe—housewives in Japan manage the family money—invested in New Zealand dollars and Icelandic kronur. These days she is placing large bets on Brazilian bonds, leading to the quip that although Tokyo failed to secure the 2016 Olympics, the Japanese will finance the games in Rio de Janeiro anyway. Yet individual Japanese investors are still only gingerly returning to their own stockmarket.

The most pernicious effects of the bust, economists say, have been transmitted via banks and businesses. Banks found themselves loaded down with non-performing loans. Belatedly they faced up to many of their losses, restructured and consolidated. But according to Takuji Aida, an economist at UBS in Japan, long-term yields remained very low because of deflationary expectations, thereby flattening the yield curve (the difference between short- and long-term interest rates). That prevented banks from earning their way out of crisis, so lending remains weak.

Companies, meanwhile, have been focused on paying down debt, as well as coping with deflation in the domestic economy and competition from cut-price imports. Large exporters were forced to restructure and enjoyed a long boom from 2002 to 2007. But firms in more protected areas of the domestic economy have fared badly: profitability, wages and investment have declined in the past decade.

This has fed back to households. As firms cut back, the proportion of full-time contract jobs has fallen from almost 80% of the labour force in 1990 to 66% in 2007, according to the OECD. The proportion of lower-paid non-regular jobs has risen correspondingly. This is partly down to the increasing role of women in the workforce, as declining wages and benefits force families to rely on two incomes. But there are long-term social costs to this extended income drought. “The slow wear-and-tear of the recession has made people much less confident of their ability to finance children,” Mr Tasker says.

A weak culture of consumer borrowing means that people have been forced to rely even more on their savings—or those of their parents. But as society ages, growth in the stock of savings has dwindled. Savings are bound to fall as more people retire. For the younger generation the next decade may be even tougher than the past two.