For Japan the nineties are regarded as the lost decade, due to slow economic growth in the formerly growth-intensive country. The slump, starting after the asset price bubble of the late eighties burst, is still going on. To identify factors contributing significantly to the unfavourable development, the article presents an analysis of the “nature” of changes in demand behaviour. The most remarkable change is in private business investment. A major reason for the significant rise and fall of the investment ratio in the wake of the emerging bubble and its bursting in the nineties was a change in growth expectations. This raises the question of whether macroeconomic policies might have reversed expectations. To estimate the role of monetary and fiscal policy in this process some policy rules are taken as a benchmark. These results for monetary policies are in line with vector autoregressive analyses indicating that monetary policy at least did not hamper economic recovery. The same applies to fiscal policies. However, they did not dominate the adverse effects of many structural problems, including the weakness of the financial system. Thus sweeping reforms in many areas of the economy are necessary.