Hi! I was working on an answer for this question for quite some time. This is a very complicated question, but there is a lot to talk about. First, there is no single causation, or put more directly, this was a multivariable process over time. This is definitely not a complete explanation. Economic development is messy and every economy is unique with unique societies and political systems attached. So I think the best nutshell summary is as Gao (2004) argues that Japan was built differently to begin with. Thus the collision of both internal and external changes caught Japan flat footed after the 1990s. So Japan had different organizations and institutions, trouble adjusting to new environments, made bad decisions, and other things.

So first, after the yen appreciated in value due to the coordinated devaluation of the US dollar in the Plaza Accord, there was a temporary recession. See here for more information on the Plaza Accord. This was expected and the yen did overshoot the target of 10 percent appreciation. This caused a temporary recession due to declining export profits. So one countermeasure to the recession was to lower interest rates. It is questionable in retrospect if the BoJ lowered too fast or too much since the recession was mild due to continued high demand in Japanese goods.

What caused the bubble? Financial liberalization and deregulation from reforms in the 1970s through the 1980s, and loose accounting practices. So when the BoJ lowered interest rates lending naturally became less expensive. The crude term in Japanese is zaitech crudely translated as ‘financial engineering’. This should show how was going to pan out. So companies and banks were able to inflate their assets and also project profitability that might have not been ‘reasonable’ using zaitech. This created a cycle of collateral that as asset prices increased, companies began taking on more and more borrowing against the higher valued assets. So this fueled the lending with the low interest rates, and further asset inflation that as long as asset values kept increasing, borrowing multiplied. However, it was straying from their fundamentals essentially: whether they could derive incomes higher than their interest payments. The Ministry of Finance (MoF), Bank of Japan (BoJ), Ministry of International Trade and Industry (MITI) and other government bureaucracies could be responsible here and there because they did push lending. They were worried about de-industrialization and offshoring assuming that bank lending could stop these things from happening or create new lucrative technologies immediately. The problem is that this lending went to medium and smaller firms that were not in manufacturing. The bigger companies were using capital markets (stocks, bonds, etc) both overseas and at home. So the large mainly manufacturing companies were significantly less at the center of the bubble and often were more prudent in financial management. The bubble was mostly in the services industries where regulation is inconsistent.

The Bubble was actually popped by the BoJ by raising interest rates and changing the lending requirements to increase the collateral on loans. As assets prices increased, it also threatened to create systemic issues like hyperinflation. Inflation was pretty strong during the bubble years, but probably in retrospect it was more controlled. Yet it is an important factor as it led to stock and real estate investments instead of safer instruments like bonds. The BoJ had to stop prices from rising or allow a bigger more catastrophic bubble burst. So asset prices fell such that the stock markets and real estate price indexes fell. The BoJ could have acted sooner, and there is valid criticism. However, the MoF, BoJ, politics, and bureaucratic power is complicatedly full conflict of interests. The MoF/BoJ were not very cooperative to each other. More later. So the bubble burst meant that real estate prices and the stock market peaked, and then began declining. Thus the recessionary period began.

Here is a summary of the causes of stagnation, which is most definitely incomplete. It is glossing over technicalities and trying to keep things brief. It is very condensed without explanations in various subtopics of economics, politics, business, history, and other things. It might be recommended to seek other sources on the technicalities, examples like theories of monetary policy and macroeconomics. Each point is its own dissertation. This has evolved into a complicated process over time so even as one topic changed, it was not always resolved and/or even evolved in some ways. However, at any point was there no possibility Japan could not return to growth.