By the middle of the 1980s, Japan's economic growth rate, which had been amazingly high, began to slow down. In January of 1989, after the death of Hirohito, Akihito became emperor of Japan in a reign called Heisei ("achieving peace"). In July, after several resignations, Kaifu Toshiki became the Prime Minister.

The LDP won in the parliamentary election during the beginning of 1990, but the Tokyo stock market began a decline which lasted until 1992. The Nikkei average lost almost two-thirds of its value. Because of his inefficiency in this matter, Kaifu was replaced in 1991 by politician Miyazawa Kiichi. Confidence in the government continued to decline as the economy began to down spiral and the government became more corrupt. In 1993, political differences and attention were put aside by the June marriage of Crown Prince Naruhito to a commoner, Owada Masako. Later that month, a group of liberal democrats, led by Hata Tsutomu and Ozawa Ichiro defeated the party and allowed smaller parties in the parliament to band together and force new elections. In the next month the Liberal Democrats lost their majority, marking the end of 38 years of dominance over the Japanese government. A seven-party coalition was instead formed and the LDP became the main opposition party. A former Liberal Democrat, and a leader in one of the new coalition parties, Hosokawa Morihiro, was elected to head of government. He was forced to step down in 1994. In June of 1992, Murayama Tomiichi, leader of the Social Democrat Party of Japan (SDPJ) was elected Prime Minister, becoming the first Socialist to lead Japan since 1948.

Throughout the 19902, Japan and Russia continued territorial dispute and strife over four islands. In August of 1994, the Russian Coast Guard fired at Japanese fishing boats near the aforementioned islands, causing more strains in the relationship between the two countries. However, in December, Japan agreed to provide Russia with aid, and in April of 1996, Japanese Prime Minister Hashimoto and Russian president Boris Yeltsin agreed to try to come to peace. Also during April, leaders of the United States and Japan signed a military-cooperation agreement which requested Japan to provide support for US forces in UN peacekeeping operations. Likewise, the United States agreed to return about 20 percent of the land in occupied in Okinawa.