CENTER ON JAPANESE ECONOMY AND BUSINESS

Working Paper Series February 2009, No. 269

The Yen and Japan’s Economy, 1985–2007

Maurice Obstfeld

This paper is available online at www.gsb.columbia.edu/cjeb/research/ac

COLUMBIA UNIVERSITY IN THE CITY OF NEW YORK

The Yen and Japan’s Economy, 1985-2007*

Maurice Obstfeld

University of California, Berkeley

November 2008

Preliminary Draft—Comments Welcome

*Prepared for the ESRI/Chicago GSB/Columbia Business School Conference on “Japan’s Bubble, Deflation, and Long-Term Stagnation,” Federal Reserve Bank of San Francisco, December 11-12, 2008. I thank Thomas Becker and Gabriel Chodorow-Reich for excellent research assistance. The paper has benefited from the helpful suggestions of Kyoji Fukao, Linda Goldberg, Koichi Hamada, Anil Kashyap, Masao Ogaki, David Weinstein, and conference participants at the March 2008 Columbia University pre- workshop. Introduction

In the late 1980s, Japan’s economy embarked on a period of rapid escalation in the prices of shares and real estate. This “bubble economy” was followed by a collapse in asset prices, a reduced pace of real economic growth, banking problems, and deflation. Nearly two decades after the demise of the bubble economy, the prognosis for Japanese growth remains uncertain amid a turbulent global economic outlook. Japan’s experience carries lessons for those hoping to understand and contain the current financial crisis originating in the United States housing market.

Some observers of Japan blame its monetary policy for failing to react promptly and aggressively enough, both as asset prices rose in the late 1980s and as they plummeted afterward. In these accounts, official concerns about the yen’s foreign exchange rate and the competitiveness of the export sector were significant considerations for monetary policy. Indeed, the yen has experienced epic gyrations since the mid-1980s, starting with its rapid ascent after the March 1985 Plaza Accord of major industrial countries. Two distinct periods of endaka fukyo, or recession induced by a strong yen, occurred in the late 1980s and the early 1990s at critical phases of the monetary policy cycle. In general, Japan’s real economic growth rate is rather strongly negatively correlated with the level of the yen’s real effective exchange rate, as illustrated in Figure 1. Over 1978-2007, the correlation coefficient between the real exchange rate and real GDP growth is −0.38.

Yet the determinants of the yen’s short- and even longer-term movements remain mysterious in light of the development of Japan’s macro economy. What factors, for example, can explain the yen’s steady and dramatic appreciation against the dollar over

1 the early 1990s as Japan’s real economy and its financial system deteriorated? In their

prominent study of the Japanese economy through 1997, McKinnon and Ohno (1997, p.

2) go so far as to “treat the course of the yen-dollar exchange rate as a forcing variable for

Japanese monetary policy, rather than assuming that monetary policy independently

determines the exchange rate.” While the U.S.-Japan trade tensions that McKinnon and

Ohno view as the underlying determinant of yen/dollar movements undoubtedly

influenced market expectations, their vision of yen fluctuations that are largely

exogenous with respect to macro policies begs the question of just how policymakers

were able to direct market-determined exchange rates toward politically expedient

levels.1

This paper explores the links between macroeconomic developments, especially

monetary policy, and the exchange rate during the period of Japan’s bubble economy and

subsequent stagnation. My approach emphasizes the interaction of short-term

developments driven by monetary factors (as they affect real interest rate differentials)

and the longer-term determinants of the real exchange rate’s path. While I believe this

approach to be fruitful, it raises further questions for future research as I describe below.

Hopefully this exploration will nonetheless throw light on the general question of how

major currency misalignments emerge and recede. The approach is unabashedly

macroeconomic in its primary focus, although there is no doubt that microeconomic

factors affecting the health of the financial system are also important, in part through

their effect on the monetary transmission mechanism.

1 As McKinnon and Ohno (1997) express their thesis elsewhere, “The erratically appreciating yen has been an independent (or exogenous) source of disturbance. And since 1984, at least, it has imposed undue deflation on the Japanese economy” (p. 199).

2 The paper begins by reviewing the broad outlines of exchange rate behavior since

the Plaza agreement of 1985.2 It then sets out a simple framework relating real interest

differentials to the exchange rate, and uses it to explore the role of monetary policies. The

paper’s second half focuses on the longer-term determination of the real exchange rate,

which informs the exchange rate forecasts underlying international real interest rate

differentials. Specifically, the paper considers the evolution of the yen’s real exchange

rate with reference to international and intersectoral productivity growth gaps, as posited

by the Harrod-Balassa-Samuelson model, and fluctuations in relative international prices

for traded goods. An important question is the extent to which sharp exchange rate

movements have themselves affected productivity levels in Japanese industry.

Real Interest Differentials, Natural Real Rates, and the Real Exchange Rate

The open or uncovered interest rate parity theory of the exchange rate has received quite

limited support from the empirical record of the modern floating exchange rate era. I will

nonetheless rely upon it as a basic framework for thinking about the link between

monetary policy and movements in the yen. Why could this be a reasonable approach?

There are three reasons:

2 A complementary study exploring this ground is Hamada and Okada (2007). Hamada and Okada sometimes verge on language seeming to imply an exogenous yen real exchange rate, which on their p. 20 they “figuratively compare to an outside temperature that Japan faced during these 20 years ….” Elsewhere, however, they clarify their belief the yen exchange rate has reacted in part to domestic macro policies. Like McKinnon and Ohno they allude to trade conflict (through a theoretical analysis of current account targets), but place little emphasis on it in their detailed policy narrative.

3 1. Some framework is essential, and our knowledge of risk premia is rudimentary at

best. It thus seems prudent to start with the simplest framework, even if it does

not fit the data exactly, and then, if necessary, add additional conjectural factors

such as risk premia.

2. If risk premia or other deviations from interest parity move slowly over time, a

first-differenced relationship could be useful even if level deviations from interest

parity are significant.

3. My focus will be on long-horizon interest parity, and the evidence (partial as it is)

suggests that interest parity may hold more closely for long-term interest rates

(see, for example, Alexius and Sellin 2002; Chinn 2006).

Modern discussions of monetary transmission – echoing the classic insights of

Wicksell more than a century ago – stress the link between the real interest rate implied by the monetary policy stance and the natural, market-clearing real interest rate. The interest-parity relation suggests, moreover, that relative international discrepancies between natural and market real interest rates have consequences for real exchange rates.

Thus, the interest-parity relationship, once reinterpreted, is a natural vehicle for linking the expansiveness or restrictiveness of monetary policy to the exchange rate. This approach is most likely to be informative when applied to long-term interest-parity,

* If rt is the long-term real rate of interest at home, rt the long-term real rate

abroad, and qt the real exchange rate (defined as the domestic consumption cost of

4 foreign consumption), then if qt is the expected long-run real exchange rate as of date t,

the (open) interest-parity condition is

* rrtt− =− qq t t. (1)

Observe that in this notation, a rise in q is a real depreciation of the domestic currency. A

* rise in rrtt− , holding qt constant, elicits a real domestic appreciation.

Let a tilde over a variable denote its “natural” level: the level consistent with market ~ clearing in a flexible-price world. In particular, qt denotes the flex-price equilibrium real

exchange rate and, qt denotes the expected long-run “natural” real exchange rate, which

– importantly – coincides with qt . In the flex-price equilibrium the analog of eq. (1)

holds:

* rrtt− =− qq t  t. (2)

By subtracting (2) from (1), we obtain a simple relationship that ties the current deviation of the real exchange rate from its flex-price level to the relative expansiveness of domestic monetary policy, as represented by deviations of market from natural long- term real rates of interest:

~ **~ ~ qqtttt=+( rr −) −−( rr tt). (3)

If the domestic real rate of interest rises relative to its natural level, for example, then the

domestic currency will appreciate in real terms relative to its own full-employment level

(everything else equal). For example, a decline in economic growth prospects would ~ naturally be associated with a fall in the natural long-term real interest rate, rt , but if

5 monetary policy is expected to remain restrictive over the medium term, the result could

well be a real currency appreciation and recession.

Of course, equation (1) by itself also has implications for the real exchange rate.

Rewrite (1) as

* qqtttt=−−( rr).

This relationship implies that if changes in the expected long-run real exchange rate qt are small and if risk premia changes are excluded, the currency will appreciate in real terms when the domestic-foreign real interest differential rises. This pattern is most likely when the main shocks hitting the economy are monetary, for pure monetary shocks do not alter the long-run real exchange rate. In reality, the implied relation between current real exchange rates and real interest differentials seems to be rather loose for most currencies. In the Japanese case, however, I will argue that monetary shocks were important and do provide some traction for understanding exchange rate movements.

This approach still leaves most of short-term exchange rate movements unexplained, of course, so it is important to keep in mind that expected real interest rates are measured with some error (due to the use of inflation-expectations proxies), that variable risk premia indeed are relevant, and that changes in expectations of long-run real exchange rates are likely to have occurred at various points.

Figure 2 displays the monthly time series of Japan less United States real interest differentials and the real yen/dollar exchange rate index, calculated on the basis of CPIs

(with an upward move in the exchange rate index being a real yen appreciation). The real interest rate is calculated as the 10-year government bond rate less the centered twelve-

6 month ex post inflation rate. For the period from June 1980 to July 2008, the correlation

coefficient between the real interest differential and the log real exchange rate is +0.45.

Evidently real interest differentials do not explain everything, but they are surprisingly

highly correlated with real yen/dollar movements, and in the direction that a simplified

interest parity theory would suggest.3

Patterns in Nominal and Real Exchange Rates

As the United States embarked on a program of disinflation and fiscal expansion in the

early 1980s, the yen and other world currencies depreciated sharply against the United

States dollar. After averaging below 220 yen per dollar over 1978-81 – that level itself a

very sharp appreciation relative to the average of 288 over 1974-77 – the yen depreciated

to about 250 in 1982, before assuming an average value of around 238 for 1983-85.

These annual averages in exchange rates disguise very high intra-year volatility,

however. Between March 1984 and February 1985, for example, the yen depreciated

from 225.40 to 260.24 against the dollar, a move of more than 14 percent (in log points).

The dollar’s renewed strength reinforced trade tensions between the U.S. and its trading

partners, and eventually led to the September 1985 Plaza Accord. The U.S. and four

major allies – the United Kingdom, France, Germany, and Japan – pledged concerted

policy intervention to bring the dollar down.

3 The bilateral real exchange rate measure and the Japanese CPI inflation measure used in calculating the real interest rate are adjusted to remove the effects of the consumption tax increases of April 1, 1989 and April 1, 1997 (from 0 to 3 percent and from 3 to 5 percent, respectively).

7 The aftermath of the Plaza accord saw a dramatic move in the yen’s dollar

exchange rate, as illustrated in Figure 3. Having been around 260 yen per dollar in early

1985, the yen price of dollars had fallen to around 125 by early 1988, an appreciation of

roughly 73 percent (in log points) over only three years. In its latter stages, the yen’s rise

was encouraged by somewhat easier U.S. monetary policy immediately following the

October 1987 stock market crash. Estimates such as those reported by Ahearne and others

(2002) suggest that Japan’s GDP was below potential in 1986 and 1987 as exporters

struggled.

At the same time, Japan’s policy interest rates, having been raised abruptly late in

1985 to support the Plaza policy, were lowered sharply through 1986 and 1987. (See

Figure 4.) From a high point above 8 percent in late 1985, the overnight call money rate

fell to just above 3 percent in the first half of 1987. And early in 1986, the prices of

equity and land began to rise sharply. Many observers, for example, Ahearne and others

(2002), Ito and Mishkin (2006), and Hamada and Okada (2007), link the Japanese

authorities’ policy response to this emerging asset bubble to the macro landscape in the

late 1980s. With the yen historically strong, output below potential, and inflation quiescent in 1986-88 during this first episode of endaka fukyo, there was no appetite to

restrict monetary policy in the hope of moderating asset-price inflation. Such action

would have risked further yen appreciation, and, as McKinnon and Ohno (1997) argue,

the wealth effect of the bubble may have moderated the growth slowdown that otherwise

would have occurred. The period was the first of several episodes in which Japan’s macro

policies, perhaps lagging “behind the curve,” contributed to a sequence of destabilizing

8 exchange rate movements that ultimately worsened the bubble and its aftermath. These episodes will be discussed in greater detail below.

Figure 3 shows that, as far as the nominal exchange rate is concerned, the yen depreciated after late 1988 through mid-1990, then embarking upon a sharp appreciation trajectory that would culminate in a rate of 80 yen per dollar in April 1995. After depreciating again through late 1998, the yen reversed course and appreciated sharply through end-1999. Since then it has remained in a range of roughly 95 to 130 yen per dollar.

More relevant for assessing the competitiveness of Japan’s exports is the yen’s real exchange rate, shown in Figure 5 for the case of consumer-price deflators. (In this graph, as in Figure 2, a rise in the index is a real appreciation.) The cycles are similar to those for the nominal exchange rate, but some distinct trends are now apparent. Most importantly, after the April 1995 peak for the yen, there is a strong trend of real depreciation, whether the real exchange rate is measured in real effective terms or bilaterally against the dollar. The real depreciation trend is driven by the relatively higher inflation rates in Japan’s trading partners over a period when Japan at times suffered from outright deflation. Our question is how these cycles and trends are driven by monetary policy actions as well as by the longer-run evolution of the Japanese economy.

9 Swings in the Real Yen Exchange Rate since 1988

Figure 5 suggests that the yen real exchange rate’s history since 1988 can be divided into

(at least) six periods, characterized by the following given changes in the extreme month- average nominal exchange rates against the dollar:

1. December 1988−April 1990: Depreciation (123 ¥/$ −158 ¥/$).

2. April 1990−April 1995: Appreciation (158 ¥/$ − 84 ¥/$).

3. April 1995−August 1998: Depreciation (84 ¥/$ −145 ¥/$).

4. August 1998−December 1999: Appreciation (145 ¥/$ −103¥/$).

5. December 1999−July 2007: Depreciation (103¥/$ −122 ¥/$).

6. July 2007−October 2008: Appreciation (122 ¥/$ − 95¥/$).

Taken in its entirety, the period after April 1995 has been one of distinct trend real depreciation. Between April 1995 and mid-2008, the yen depreciated in real effective terms (based on the CPI, and as a log difference) by 57 percent. For the bilateral yen/dollar rate, the corresponding real depreciation rate is 60 percent. As Figure 3 suggests, the yen’s nominal value against the dollar has not changed greatly since mid-

1996, yet the yen has depreciated markedly against the dollar in bilateral real terms as a result of the divergent inflationary trends in Japan and the United States.

Period 1. After the protracted appreciation period the followed the Plaza

agreement, the yen appeared to stabilize early in 1988. That development was welcome

and boosted the economy. The asset-price boom continued, however, and inflationary

forces, which remained muted after a period of yen strength, were in fact gathering. (See

Figure 6, which shows Japanese and U.S. core inflation. In this Figure, Japan’s CPI is not

10 adjusted to remove the effects of the April 1, 1989 and April 1, 1997 increases in

consumption tax.) Apparently unwilling to risk renewed appreciation, however, the

Japanese authorities did not aggressively raise target interest rates (see Figure 5).

Inflationary pressures were evident earlier in the U.S., however, and the Fed did respond

with a series of interest rate hikes starting in the second half of 1988 (Figure 7).4 The yen started to depreciate late in 1988.

The Bank of Japan began to raise short-term interest rates in mid-1989. Core inflation was significantly higher by the spring of 1990 – by which time the price-level effects of the April 1989 consumption tax increase are no longer distorting the data in

Figure 6. Yen depreciation continued. Even after the stock market peaked late in 1989 and the yen hit bottom in April 1990, and with Japanese and U.S. long-term real interest rates close once again, the BOJ continued to tighten short rates. Around that time

Japanese inflation also took a ratchet-step upward.

Why did the yen depreciate through April 1990 and not begin to appreciate sooner after Japanese monetary policy began to tighten? One possibility is that falling Japanese equity prices prompted an international portfolio shift out of yen. It may also be that the markets had some doubts about the willingness of the BOJ, not a formal inflation targeter, to do what was necessary to keep inflation down. As the policy interest rate continued to climb, however, markets became convinced that the BOJ meant to limit

4 The “Record of Policy Actions of the Federal Open Market Committee,” Meeting of May 17, 1988 (http://www.federalreserve.gov/monetarypolicy/fomchistorical1988.htm), noted that “consumer and producer prices have risen more rapidly recently. In addition, labor costs increased substantially in the first quarter,”

11 inflation. At this point, Japanese long-term real interest rates had generally been above

U.S. rates for some time (Figure 2).5

Period 2. With long-term Japanese real interest rates exceeding those of the U.S. in the spring of 1990, and Japanese short-term rates continuing to rise, the yen began to appreciate sharply. In the last quarter of 1990 the Japanese long-term nominal interest rate fell below the overnight rate, which stood at better than 8 percent throughout the first quarter of 1991. The sharp reversal in interest-rate policy that began in the spring of 1991 moderated the pace of yen appreciation but did not induce depreciation. One reason was that the U.S. monetary tightening cycle had peaked in the fall of 1990, and U.S. policy rates were falling rapidly from the end of the year. The Fed’s view was that, despite the possible inflationary effects of a rise in oil prices, U.S. real activity was slowing.6 By the final quarter of 1991, the Japanese economy was suffering the coincidence of a strengthening currency, uncomfortably high inflation, and asset-price collapse. In 1991,

Japan’s real GDP growth slowed whereas the U.S. entered a mild recession. As U.S. growth recovered in 1992, however, Japan’s slowed further and it remained low in 1993.

In 1994, Japanese growth turned sharply negative (Figure 8).

Contributing to poor growth performance was a sharp upward movement of the yen (roughly 25 percent) between mid-1992 and the last quarter 1993. This was the start of the second great episode of endaka fukyo. At this point U.S. inflation had largely stabilized but Japanese inflation was falling. Inflation expectations may therefore have played some role in the yen appreciation over 1992-93, but from a macro perspective the

5 Clarida and Waldman (2008) show that the response of exchange rates to inflation news has been quite different as between inflation-targeting central banks and non-targeters (such as the BOJ and the Fed).

12 appreciation remains puzzling. It seems likely, however, that U.S.-Japan trade tensions

created expectations that the Japanese authorities would not allow the yen to depreciate

far. This is the interpretation favored by McKinnon and Ohno (1997). In January 1992,

President George H. W. Bush visited Japan and secured commitments to specified

increases in imports of autos and auto parts from the U.S.7 The election of the

Democratic Clinton administration in November 1992 may well have raised expectations

of a more confrontational trade stance by the U.S. Coupled with Japan’s slow growth,

U.S. recovery was leading to an expansion in American imports from Japan, and this, paradoxically, added to the tense atmosphere regarding trade.

As Japan’s short-term interest rate fell and the Fed kept short-term rates on hold, the yen stabilized, but a renewed appreciation episode started in mid-1994, just as the yen overnight interest rate stopped falling and began to inch upward. Between June 1994 and

April 1995, when the yen reached its all-time peak, the yen appreciated by 12.5 percent

(log points) in real effective terms and by 18 percent (log points) in real terms against the dollar. This episode has puzzled observers, as it occurred when the Japanese economy was already quite weak and about to fall into deflation.

As of early 1994, however, private and policy forecasts discerned signs of recovery, and indeed, at that point the long-term yen nominal interest rate began to move up. Ahearne and others (2002, p. 17) quote the BOJ Quarterly Bulletins for May and

November 1994 as pointing, respectively, to stabilization of the economic growth rate and to strength in “all categories of spending….” Short-term interest rates remained on

6 See The “Record of Policy Actions of the Federal Open Market Committee,” Meeting of November 13, 1990 (http://www.federalreserve.gov/monetarypolicy/fomchistorical1990.htm). The average price of crude petroleum doubled temporarily between the summer and fall of 1990 as Iraq invaded Kuwait in August.

13 hold, however, and with the fundamentals of the economy in reality deteriorating, it is

possible, as Ahearne and others (2002, p. 18) suggest, that the market real interest rate

rose above the natural rate, prompting the sharp yen appreciation of early 1995. This

result is consistent with the prediction of equation (3). The sharp appreciation itself,

coupled with the Kobe earthquake and falling equity prices, helped snuff out a possible of

economic recovery. Early in 1995, headline CPI inflation, which had risen slightly

toward the end of 1994, dropped to around zero. Core inflation also was low and

declining (Figure 6).

Period 3. In April 1995, a series of dramatic policy interventions, carried out by

both Japanese and foreign authorities, initiated a new, long-term weakening trend for the

yen. The BOJ discount rate was slashed and the yen overnight interest rate fell

dramatically, reaching a level of about 0.5 percent by the fall of 1995. As described by

McKinnon and Ohno (1997, pp. 226-8), the U.S. eased mercantile pressures and Japan,

while several countries carried out joint interventions to support the dollar in currency

markets. The Japanese authorities had purchased dollars in unilateral official intervention

operations on 21 days in March 1995 as the yen continued to rise. They intervened on

eight more days between April 3 and 18, purchasing about $500 billion for the month.

Nominal long-term interest rates in Japan fell dramatically as expectations of low

growth and low inflation took hold. As Figure 2 shows, Japan’s long-term real interest rate fell far below that of the United States. From a level of around 4.2 percent per year in

March 1995, the nominal10-year JGB rate fell to a low of around 0.9 percent in the fall of

1998. Not only did Japanese nominal long-term rates rise after that point, but also,

7 This visit may best be remembered as the one in which President Bush, at a state dinner, vomited into Japanese Prime Minister Miyazawa’s lap.

14 accelerating Japanese CPI deflation had started to cause the long-term real Japanese interest rate to start trending upward. Even before that point, U.S. short and real long- term rates had started to decline in the aftermath of the Asian financial crisis. Eventually those factors halted the yen’s depreciation.

Because a number of East Asian countries pegged their currencies to the dollar as of 1995, the yen’s depreciation from its height made those countries’ export sectors less competitive. Some observers argued that this was a contributing factor behind the 1997-

98 Asian crisis.

Period 4. It was in August 1998 that the yen’s next phase, a real appreciation cycle, began. During this period, Japan’s real long-term interest rate rose relative to that in the United States. In Japan the overnight interest rate stood at just under 0.5 percent and would fall effectively to zero within a year, but in the presence of deflation expectations, yen appreciation continued. At the point when the zero lower bound was reached late in February 1999, the BOJ had no further ability to lower the short-term nominal interest rate. By the end of 1999, Japanese and U.S. real long-term interest rates were again very close, and the upward trend in the (negative) Japan-U.S. differential had ceased (Figure 2), in part because U.S. headline inflation had moved upward.

Over the entire period from August 1998 to December 1999, the yen appreciated in real effective terms by 29.8 percent and in real bilateral terms against the dollar by

31.2 percent.

Period 5. In the subsequent long real depreciation phase, a falling yen price level reinforced the yen’s nominal depreciation against the dollar. The yen fell sharply in real terms through the end of 2001 as Japan’s relative real interest rate fell. From August 2000

15 to March 2001 the BOJ moved policy interest rates above zero, having perceived signs of

recovery despite a core inflation rate that remained negative (Ito and Mishkin 2006, pp.

145-6). This move caused a small temporary strengthening of the yen, but economic

activity slowed and deflation accelerated.

The yen stabilized and even rose (against the dollar) after early 2002 as Japan’s

real interest rate rose toward the U.S. level (Figure 2), but depreciation returned early in

2005 despite a relative Japanese real interest rate that continued to rise for several months

(part of the Greenspan “conundrum” period).

Hamada and Okada (2007) argue that the yen would have appreciated far more in

2003-04, crippling Japanese recovery, if not for the energetic dollar purchases carried out

by Japan’s Ministry of Finance under Vice Minister Zembei Mizoguchi. Between January

2003 and the end of March 2004, the MOF sold ¥35,256.4 billion for dollars in the

foreign exchange market.8 Ito (2004) discusses the rationale and context for these

interventions in detail and suggests that while they could have had a weakening effect on

the yen of up to 13 percent compared to the counterfactual of no intervention, it is also

possible that their effects were mostly temporary. In any case, the Fed had begun to

tighten U.S. monetary conditions in mid-2004 in the face of mounting inflation pressure

(Figures 5 and 6). From April 2005 Japanese long-term real rates began to fall compared

to the U.S., and yen depreciated accelerated.

On July 15, 2005, the BOJ definitively ended its zero-interest policy regime

(Figure 5). Even with some signs of Japanese recovery and Japan’s relative real long-

8 See Ministry of Finance Japan, “Foreign Exchange Intervention Operations,” http://www.mof.go.jp/english/e1c021.htm.

16 term interest rate rising, yen depreciation continued through July 2007. It could be that markets perceived unusually high risks in a period of monetary policy transition.

Period 6. Yen behavior during this period is dominated by Japan’s emergence as a relative safe haven in a period of global financial market crisis. Paradoxically, the weakness of Japan’s financial system over prior years may have deterred Japanese institutions from overextending themselves during the 2000s, unlike institutions in

Europe and especially the United States. Japanese institutions, unlike many in Western

Europe, had relatively little exposure to eastern Europe and Latin America, so the yen strengthened sharply in the fall of 2008 as emerging markets and some industrial countries came under financial pressure.

Yen Movements over the Long Run

Movements in relative real long-term interest rates offer some insight into short-term exchange rate dynamics, but it is also likely that perceptions of long-run real exchange rates changed over the period following the collapse of Japan’s asset bubble. We would like to understand whether and when such changes in long-term perceptions occurred, and a related challenge is to explain the observed long-term trends in the yen’s real exchange rate. I now turn to the question of long-term changes in the yen and their relationship to underlying economic fundamentals.

17 The Harrod-Balassa-Samuelson Approach

Perhaps the most fundamental benchmark model for thinking about real exchange rates is

the Harrod-Balassa-Samuelson (HBS) model (see Rogoff 1992; Asea and Mendoza 1994;

or Obstfeld and Rogoff 1996, Chapter 4). The model posits economies with two sectors,

tradable and nontradable goods. In essence, the real exchange rate depends on the

international “difference in differences” between the economies’ tradable-sector and

nontradable-sector productivity growth rates.

To understand the HBS approach, let P be Japan’s consumer price level and P* that of the United States, with E the price of yen in terms of dollars. Then the real

exchange rate of the yen against the dollar (defined so that an increase is a relative real

depreciation of the yen) is q = EP*/P. In this notation, a rise in E (nominal yen depreciation) or rise in P*/P (fall in Japan’s relative money price level) lowers the price

of consumer goods in Japan compared to the U.S.

Each country’s consumer price level, in turn, depends on the domestic price

* * indexes for tradable and nontradable goods, denoted PT and PN for Japan and PT and PN for the United States. In general, as shown by Obstfeld and Rogoff (2007, p. 356), a useful approximation for the change in the log yen real exchange rate is

** * PPNT/ EPT ∆≈−∆logq (1γ ) log +∆ log , (4) PPNT/  P T

where γ is the share of tradables in the CPI (the same in the two countries). This equation

discloses the two main determinants of the real exchange rate: the international ratio of

relative nontradables prices, and the relative international price of tradables.

18 The HBS theory presumes that the law of one price holds for every tradable good and that consumers in the two countries have identical preferences over the tradable

* goods. Thus, EPPTT= , so that the HBS theory operates entirely through the determination of the relative price of nontradables in terms of tradables. There is considerable evidence, however, that relative international tradables prices vary greatly, at least for some country pairs and over some horizons. Moreover, they tend to covary positively and strongly with nominal exchange rates, so that nominal yen depreciation, for example, raises the price level of tradables in Japan relative to tradable price levels abroad. For Japan, the terms of trade broadly mirror the evolution of the exchange rate, with nominal (and real) yen depreciation generally associated with deterioration in

Japan’s terms of trade – a rise in import price relative to export prices. I tentatively put this evidence aside to focus on the HBS predictions about relative nontraded-goods prices, predictions that are broadly consistent with data from many countries.

Over a sufficiently long horizon – one in which goods prices are flexible and domestic factor markets can adjust to ensure the equality of factor rewards across sectors of the economy – relative productivity growth is a prime determinant of the first term on the right-hand side of equation (4). To see this, assume that outputs in the tradable and nontradable sectors are given by the constant-returns production functions of capital and labor:

YAFKLTT= ( TT,,)

YAGKLNN= () NN,,

19 9 where AT and AN measure total factor productivity (TFP). Let µLT denote labor’s

income share in tradables, µLN its share in nontradables, and xˆ the proportional rate of

change of variable x. Furthermore, define the relative price of nontradables asp ≡ PPNT / .

Proceeding as in Obstfeld and Rogoff (1996, Section 4.2.1), but allowing for the

possibility that both the real (tradable) wage w and the real (tradable) return to capital r

can change, log differentiation of zero-profit conditions, assuming firm optimization and

free domestic factor mobility, yields

ˆ AwrrTLT=−+µ ()ˆˆ ˆ, ˆ (5) pˆˆˆˆ+=AwrrNLNµ () −+.

Combining these results in a relationship linking the change in the real exchange rate to

relative TFP growth,

ˆˆ pˆˆˆ=−+AATN().µµ LNLT −( wr −) (6)

In general, the change in p depends not only on the sectoral difference in TFP growth, but

also on the evolution of the wage-rental ratio, with a rise in the latter raising p when nontradables are relatively labor intensive.10 If there are significant movements in relative

factor rewards over time and intersectoral differences in functional income shares, then

9 It would be simple to include nontraded goods as an input to tradables (think of retailing services required to deliver tradables to final consumers). That change would not alter the main qualitative predictions concerning relative sectoral TFP and the relative price of nontradables, but it would place a wedge between different countries’ price indexes for tradable consumption. That additional wedge would, however, depend mainly on relative nontradables prices. 10 One could solve for the endogenous wage-rental ratio in terms of exogenous variables by imposing further structure on the consumption side and assuming a balanced growth path, as Asea and Mendoza (1994) do, but at the cost of restricting generality. For my purposes it is not necessary to follow that route. In the context of a growth model, and assuming a balanced growth path with a constant marginal product of µ ˆ LN ˆˆ capital r, equation (5) would imply that wAˆ = /.µ Accordingly, (6) implies pAAˆ − . This is TLT = TN µ LT the formula in Obstfeld and Rogoff (1996, Chapter 4) for the case of a constant world real interest rate.

20 the relation between the relative price of tradables and sectoral TFP growth rates may not be straightforward. Evolution in the relative price of nontradables will depend exclusively on differential TFP growth only in very special cases, for example, when sectoral factor shares are the same.

One way to circumvent the problem is to focus on labor productivity rather than total factor productivity, as Canzoneri, Cumby, and Diba (1999) do. That approach potentially confounds exogenous long-term TFP movements with demand-side factors, but it has a number of countervailing advantages, as Canzoneri, Cumby, and Diba show.

To understand their approach, observe that along the economy’s long-run production possibilities frontier, p equals the ratio of labor’s marginal physical productivity in tradables to its marginal physical productivity in nontradables. Let

fk()TTT≡ FK (/,1 L ) and gk()NNN≡ GK( /,1 L ) . Under the tentative assumption that marginal labor products are proportional to average labor products, one can therefore write

AfkTT( ) − fkk′( TT) ϕ A fk( ) p ==TT ′ AgkNN()− gkk () NNψ ANNgk()

for suitable constants φ and ψ. Log-differentiating this expression, one finds that

pˆ =+−AkAkˆˆ11.µµˆˆ − −−  TLTTNLNN() ()

21 ˆ ˆ Here, AkTLTT+−()1 µ is the growth rate of (average) labor productivity in tradables (in

ˆ ˆ contrast to TFP in tradables), whereas AkNLNN+−(1 µ ) is the growth rate of labor productivity in nontradables. (In general, labor productivity growth rates exceed TFP growth rates when there is capital deepening over time.)

The earlier tentative assumption that marginal and average labor products

coincide can hold true only if the last equation is the same as equation (6). Let σT and σ N be the elasticities of factor substitution in the traded and nontraded goods sectors. Then one can express the last equation in terms of factor-price changes as

pˆˆˆˆˆ=+−AwrAwrˆˆ11.µσ −− −− µσ − TLTTNLNN( )() ( )()

This equation is valid – that is, it agrees with equation (6) – when (and only when)

σTN==σ 1.Thus, for Cobb-Douglas production functions, the long-run relative price of

nontradables depends exclusively on differential labor-productivity growth in

nontradables and tradables. I will assume that Cobb-Douglas production functions

adequately represent Japanese industry.

Below I explore the relationship between the preceding labor productivity

differential and the yen’s real exchange rate. One point to notice, however, is that for the

tradable and nontradable sectors, short-term movements in labor productivity and TFP

are very highly positively correlated. The six panels of Figure 9 (a through f) illustrate

this correlation for the tradable and nontradable sectors of Japan, the United States, and

Germany. Productivity growth rate data are from the EU KLEMS database

(http://www.euklems.net/, March 2008), and sectoral productivity figures are constructed

22 from less aggregated industry figures using a Törnqvist index with value-added

weights.11 As an example, for Japanese tradables the contemporaneous correlation coefficient between labor productivity and TFP growth rates is 0.95; for Japanese nontradables the corresponding correlation coefficient is 0.94. Note that, as the HBS literature suggests, productivity growth in tradables is generally higher than that in nontradables, with the implication that the relative price of services should rise secularly.

Evidence on HBS and Its Component Sub-theories

For much of its postwar history Japan was a poster-child for the HBS theory. In an early

study, Hsieh (1982) derived a one-factor version of the HBS theory and tested it on labor

productivity data for Japan and Germany versus aggregates of major trading partners. For

his study, tradables were defined as manufacturing and nontradables as

nonmanufacturing. The theory received support for both countries, but over a sample

period (1954-1976) containing very few observations from the post-1973 floating exchange rate era. As I argue below, however, deviations from the HBS model are likely to be larger and more persistent under floating exchange rates.12

Marston (1987) offered the first detailed study of Japan based on a substantial

span of data from the floating exchange rate period (1973-1983). Marston found that in

the U.S. over that period, tradables productivity growth exceeded that in nontradables by

13.2 percent. For Japan, he found that the same cumulative differential was 73.2 percent.

11 Tradables consist of agriculture, hunting, forestry, and fishing; mining and quarrying; total manufacturing; and electricity, gas, and water supply. Nontradables consist of construction; wholesale and retail trade; hotels and restaurants; transport, storage, and communication; finance, insurance, real estate, and business services; public administration and defense; compulsory social security; education, health, and social work; and other community, social, and personal services. 12 Hsieh’s findings in support of HBS went against previous negative cross-section work reported by Officer (1976).

23 Japanese relative nontradables prices rose by 56.9 percent as opposed to only 12.3

percent in the U.S, The yen appreciated significantly against the U.S. dollar in real terms.

These results seemed strikingly to confirm the HBS approach.13

Subsequent research has focused on larger samples of countries. De Gregorio,

Giovannini, and Wolf (1994), using the newly assembled OECD sectoral database for

1970-85, showed a strong relationship between differential sectoral TFP growth and the

growth of relative nontradables prices for a sample of 14 countries including Japan. They

did not look explicitly at real exchange rates. Asea and Mendoza (1994) reached similar

conclusions regarding relative sectoral prices levels within the OECD sample, but found

that TFP differentials were much less useful in understanding even low-frequency

movements in real exchange rates.

That failure is not surprising in view of equation (4), as a major role in

movements of the real exchange rate, alongside that of relative sectoral prices, is played

by the relative international price of tradables. Under floating exchange rates, the latter

relative price is highly correlated with the nominal exchange rate in the short run, and

hence is much more volatile than either of the relative prices p and p* that enter the first right-hand term in (4). The volatility in relative international tradables prices, to some degree, reflects widespread violations of the law of one price; it also reflects terms of trade changes (given international differences in consumer preferences) as well as the nontradable content of final “tradable” consumption goods. Engel (1999) argues that even

13 In a related vein, Yoshikawa (1990) claimed an important role for relative labor productivities in determining the long-run nominal yen/dollar exchange rate over 1973-87. Yoshikawa’s model assumed an average law-of-one-price relationship for tradables, and allowed for changes in the relative price of energy inputs. Rather than focusing on relative productivity in nontraded and traded sectors, however, Yoshikawa’s model focuses on the relative importance of labor and energy in producing export goods. I do not consider energy costs below. Energy costs in effect work like a global technology shock for energy

24 over longer horizons, variation in the relative international prices of tradables dominates

real exchange rate movements of the United States dollar. Were Hsieh’s (1982) tests to

be carried out over post-1973 data, it seems certain that any measured effects of

intersectoral productivity differentials would be swamped by the influence of nominal

exchange rate movements.14

Many recent studies employ error-correction models to look for cointegrating

relationships among real exchange rates and the other variables that underlie the HBS

model. The basic presumption of these models is that real exchange rates contain unit

roots. While the unit-root hypothesis has proved difficult to reject in the spans of data that

are typically used, the question of mean reversion in real exchange rates in fact remains

quite open, with many researchers believing in some degree of slow mean reversion, a

belief derived in part from the analysis of longer time series samples. Thus, Taylor and

Taylor (2004, p. 154) describe as a “consensus view” the propositions “that short-run

PPP does not hold, that long-run PPP may hold in the sense that there is significant mean

reversion of the real exchange rate, although there may be factors impinging on the

equilibrium exchange rate through time ….” It should be kept in mind that the statistical

tests described next all rely on the hypothesis that real exchange rates and their

determinants are I(1) random variables,

Retaining a focus on the OECD sectoral data but working in terms of labor productivity as noted above, Canzoneri, Cumby, and Diba (1999) looked separately at the two components of the HBS model: the ability of sectoral productivity differences to

importers, and can influence long-term real exchange rates to the extent that energy input shares differ across sectors and countries. 14 Park and Ogaki (2007) caution, however, against drawing long-run implications from data samples of the size that Engel uses.

25 explain the relative price of nontradables in terms of tradables, and the validity of

purchasing power parity (PPP) with respect to indexes of tradables prices. Using 1970-

1993 data, carry out a panel cointegration analysis aimed at ascertaining long-run

dynamic features of the data record. They found that relative sectoral prices and relative

productivities were cointegrated with a coefficient near 1.0.15 However, nominal exchange rates against the U.S. dollar were not cointegrated with tradables prices relative to those of the U.S. Interestingly, the hypothesis of PPP for tradables fared much better when Germany rather than the United States was used as the comparison country. Kakkar and Ogaki (1999), also using cointegration techniques, explicitly studied long-run comovements in real exchange rates and relative nontradables prices. Their long data sample, ranging from as early as 1929 to the late 1980s, contained several spans with fixed exchange rates. Particularly in floating-rate data, they found mixed support for a close long-run relationship between relative nontradables prices and real exchange rates.16 This is consistent, once again, with a large role for nominal exchange rate

movements in driving deviations from PPP for tradable goods.

A number of studies focus explicitly on real exchange rates of East Asian

countries. Some authors, such as Chinn (2000, p. 20), argue that “The East Asian

economies are exactly the type for which Balassa posited the relevance of the HBS effect:

economies characterized by rapid growth, presumably due to rapid manufacturing—and

hence traded—sector productivity growth.” Ito, Isard, and Symansky (1999), Drine and

Rault (2003), and Thomas and King (2004), however, all find mixed evidence concerning

the HBS theory. Chinn (2000) himself studies the bilateral real exchange rates of a group

15 Kakkar (2003) established the same result for a model based on TFP measures.

26 of nine East Asian countries, including Japan and China, against the U.S. dollar. He finds that for Japan, Malaysia, and the Philippines, the real exchange rate is cointegrated with relative sectoral labor productivities based on a 1970-93 sample. He notes, however, that real exchange rates display protracted swings away from the levels predicted either by relative nontradables prices or by relative productivity levels. Kakkar and Yan (2006) assemble a disaggregated data set of TFPs for Hong Kong, Indonesia, Korea. Malaysia,

Singapore, and Thailand, They find that in panel data, real exchange rates appear cointegrated with relative sectoral productivity differentials, but whereas long-run PPP for tradables appears reasonable when East Asian currencies are compared to the yen, it fails when the dollar is the comparison currency. This difference could result from the closer trading linkages among the East Asian countries, including Japan.17 Choudhri and

Khan (2005) present a panel study of 16 emerging market countries, including some in

East Asia, over 1976-94. They find that bilateral real exchange rates against the dollar are related to relative nontraded goods prices and that the latter are, in turn, related to relative labor productivity as the HBS theory suggests, but they do not test directly for a link between real exchange rates and relative sectoral productivity differences. They also find a role for the terms of trade in determining real exchange rates.

The body of evidence on the HBS theory indicates a definite connection between international differences in relative sectoral productivity levels and international differences in the price of nontraded in terms of traded goods. The connection seems

16 Similarly mixed evidence is found by DeLoach (1997), who uses CPI/WPI ratios to proxy relative nontradables prices. 17 Kakkar and Yan (2006) combine the equations in (5) by eliminating wrˆˆ− rather than rˆ . The result is µµµ− LN LT LN pAAˆˆ=−+TN r, rather than equation (6). The authors then work with the level form of µµLT LT

27 valid whether productivity is measured by output-labor ratios or by TFP. Direct linkages

between productivity variables or relative price variables and real exchange rates is more

tenuous, especially under floating nominal exchange rates, because of large and persistent

deviations from purchasing power parity for tradables; see equation (4). These deviations

may limit the usefulness of the HBS theory for explaining or predicting real exchange

rates over all but the longest horizons. PPP for tradables – and therefore the HBS

connection between relative productivity levels and real exchange rates – may hold more

closely for pairs of countries with relatively extensive mutual trading links.

Sectoral Productivity and the Yen’s Real Exchange Rate

A real yen appreciation caused by high productivity growth in tradables would not

undermine the competitive position of Japanese exporters. The available evidence

indicates, however, that at least in the short run, episodes of sharp yen appreciation have

indeed harmed the fortunes of Japan’s manufacturing exporters, with negative

implications for overall Japanese economic growth (as suggested by Figure 1). Dekle and

Fukao (2008) document how the yen’s 1985-95 appreciation raised average costs levels

in Japanese industries relative to those in the United States.

A first regularity to examine is the short-run relationship between real exchange

rate movements and changes in the HBS relative productivity variable, which I define in

terms of relative labor productivity as YLˆˆ−− YL ˆˆ − − YL ˆˆ** −− YL ˆˆ ** − . In TT( NN)  TT( NN)

practice, I take the “starred” foreign country to be either the U.S. or Germany. Figures

10a and 10b plot the data, which show no evidence of short-run positive correlation.

this equation under the hypothesis that the real return to capital, r, is an I(0) random variable. Their

28 Indeed the sample correlation coefficients are slightly negative, equal to −0.14 for the comparison with the U.S. and to −0.16 for the comparison with Germany. These short- term comovements are the opposite of what the HBS theory predicts as a longer-term correlation.

In the short term, when prices are sticky and factors are immobile between sectors, real yen appreciation reduces the demand for Japanese exports and puts downward pressure on exporters’ profit margins. This account is consistent with the evidence in Dekle and Fukao (2008). The appreciation could result from monetary factors as discussed earlier, from changed perceptions of the long-run equilibrium real exchange rate, or from shifting risk premia. Faced with reduced demand, Japanese exporters react immediately by reducing levels of capacity utilization and working existing labor pool less intensely. These adjustments, in turn, lower measured productivity, whether measured as TFP or as labor productivity.

For the United States, Basu (1996) has made a compelling case that procyclical rates of factor utilization play the main role in explaining the observed high degree of procyclical overall productivity.18 His analysis uses data on material inputs effectively to

track firms’ use of capital and labor inputs. It would be interesting to use methods like

Basu’s to more closely isolate the exogenous technological shocks driving observed

productivity movements in traded and nontraded sectors. The resulting data would deliver

a sharper test of the HBS theory.

methodology obviously obliges them to supply labor-income shares in tradables and nontradables. 18 For a related analysis using Japanese data, see Vecchi (2000).

29 In Figures 10a and 10b, real exchange rate movements are more volatile than the

contemporaneous movements in international relative productivity ratios. The latter are,

however, still surprisingly large. A yen appreciation lowers demand for tradable goods

and may raise the demand for nontradables. To the extent that slow growth in the export

sector depresses overall demand, however, any resulting rise in the cyclical component of

nontraded-sector productivity may be dampened. In fact, over 1978-2005, the correlation

between changes in Japanese tradable and nontradable productivity is only 0.05,

effectively zero.

An analysis of longer-term changes in productivity levels and real exchange rates gives a sense of whether the historical trends are consonant with the HBS theory. For this purpose, I use the log levels version of equation (4), taking γ = 0.25 and identifying the relative prices p and p* with the tradables-to-nontradables labor productivity ratios.

Figures 11a and 11b present the data for the comparison of Japan against the U.S. and

Germany, respectively, over the nearly three decades from 1978-2005. Against the U.S.,

over this entire period, Japan experiences a small real depreciation and a small decline in

the HBS relative intersectoral productivity variable. In the interim, however, the swings

away from “Harrod-Balassa-Samuelson” parity are huge and persistent. On this metric,

the yen was about 50 percent “undervalued” during the strong dollar of the Reagan years,

and about 40 percent “overvalued” during the height of the mid-1990s appreciation,

which pushed Japan into protracted deflation. The “overvaluation” of the first endaka

fukyo of the late 1980s is comparatively small and briefer, as is the “overvaluation” that

emerges after the Asian crisis (August 1998−December 1999, described as Period 4

above). In all of these episodes, often identified as misalignments, sharp movements in

30 the yen’s nominal exchange rate were associated with commensurately sharp movements in relative international tradables prices. As in equation (4), those developments helped to drive the real exchange rate far from the HBS benchmark.

In most of the subperiods of the 1978-2007 span, the yen’s evolution is in fact the opposite of what the HBS theory would imply. Furthermore, the relevant productivity trends seem quite minor in magnitude compared to the long swings in the exchange rate.

Changes in real exchange rates are more volatile than changes in productivity, yet are quite persistent.

The bilateral real exchange rate of the yen against Germany puts the HBS theory in a better light. The real exchange rate still fluctuates about the HBS trend, but the departures are much smaller and less persistent than in the yen/dollar case. Notable examples of “misalignment” – in the narrow sense of a significant departure from the

HBS trend – are the yen’s real depreciation against the deutsche mark at the time of the second oil shock of the late 1970s, real appreciation in the mid-1990s (less pronounced than that against the United States), and a substantial real appreciation around the launch date of the euro in 1999.

An interesting question is why HBS seems to be more successful in explaining swings of the Japanese currency against Germany than against the United States.

Canzoneri, Cumby, and Diba (1999) likewise found that convergence to PPP for tradables held more closely when they compared OECD countries to Germany, rather than the U.S. As the world’s premier exporter, Germany’s integration into global markets exceeds that of the larger and more insular United States economy. This may explain the greater apparent coherence between world and German tradables prices, which, in turn,

31 might reduce the size and persistence of departures from an HBS benchmark. An

interesting general question is whether predictions of the HBS theory holds more closely

for economies that are more open to international trade.

Conclusion

The recent history of the yen suggests prolonged departures from longer-run trends,

especially with respect to the U.S. dollar. These departures cannot be explained reliably

even after the fact, but they appear to be related to macroeconomic policy actions, both in

Japan and abroad, and to market expectations of future policies.

In Japan’s economic history after the generation and collapse of the great asset

price bubble, the yen’s strong real appreciation in 1990-95 stands out as a pivotal episode. From the point of view of the Harrod-Balassa-Samuelson theory, prior sectoral growth trends changed around this time, and it is doubtful that foreign exchange market participants were able to foresee these structural shifts. Against the United States, relative tradables productivity growth actually went into decline, whereas against

Germany it leveled off, as Figures 11a and 11b show. To the extent that foreign exchange markets were mistakenly expecting a return to previous growth trends, the yen’s real exchange rate could have been artificially high. Short-term monetary developments may have reinforced the latter stages of this appreciation, and trade tensions with the United

States certainly played a role, as discussed above. In any case, the strong yen appreciation helped propel the Japanese economy into stagnation and deflation.

32 The yen’s trend depreciation since early 1995 is more easily justifiable in terms of the underlying evolution of sectoral productivity growth and of overall growth in Japan and its trading partners. Real yen depreciation after 1995 has to some degree bolstered the economy through export promotion, though renewed trade friction with the United

States remains a threat.

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36 Figure 1: Yen real exchange rate and Japan's growth

115

7 105

5 95

3 85

1 75

65 -1 Real effective exchange rate (index) Real GDP growth rate (percent per year)

55 -3 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006

Real yen exchange rate based on unit labor costs Real GDP growth

37 Figure 2: Japan less US: real long-term interest differential

150 2.8 140 1.8 130 0.8 120

-0.2 110

-1.2 100 Jun-80 Jun-82 Jun-84 Jun-86 Jun-88 Jun-90 Jun-92 Jun-94 Jun-96 Jun-98 Jun-00 Jun-02 Jun-04 Jun-06 90 -2.2 80 -3.2 70

-4.2 60

-5.2 50

Japan -US real long-term interest differential Real yen/dollar exchange rate

38 Figure 3: Yen/dollar nominal exchange rate

275

255

235

215

195

175

155

135

115

95

75

80 81 82 84 85 86 88 89 90 92 93 94 96 97 98 00 01 02 04 05 06 08 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 20 20 20 20 20 20 20 1 5 9 1 5 9 1 5 9 1 5 9 1 5 9 1 5 9 1 5 9 1 M M M M M M M M M M M M M M M M M M M M M M

39 Figure 4: Yen nominal short-term interest and nominal exchange rate

275 9

255 8

235 7 215 6 195 5 175 4 155 3 135 2 115

95 1

75 0

2 3 4 5 7 8 9 0 2 3 4 5 7 8 9 0 2 3 4 5 7 8 98 98 98 98 98 98 98 99 99 99 99 99 99 99 99 00 00 00 00 00 00 00 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 2 2 1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4 M M M M M M M M M M M M M M M M M M M M M M

Nominal yen/dollar rate Yen overnight interest

40 Figure 5: Yen/dollar real CPI exchange rates

140

130

120

110

100

90

80

70

60

50

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 19 19 19 19 19 19 19 19 19 19 20 20 20 20 20 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 M M M M M M M M M M M M M M M

Real effective Bilateral versus dollar

41 Figure 6: Japan and US Core CPI Inflation

6

5

4

3

2

1

0

83 85 87 89 91 93 95 97 99 01 03 05 07 n-1- n- n- n- n- n- n- n- n- n- n- n- n- Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja

-2

-3

Japan core CPI inflation US core CPI inflation

42 Figure 7: Dollar nominal short-term interest and nominal exchange rate

275 15

255 13 235 11 215 195 9

175 7

155 5 135 3 115 95 1

75 -1

2 3 4 5 7 8 9 0 2 3 4 5 7 8 9 0 2 3 4 5 7 8 98 98 98 98 98 98 98 99 99 99 99 99 99 99 99 00 00 00 00 00 00 00 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 2 2 1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4 M M M M M M M M M M M M M M M M M M M M M M Nominal yen/dollar rate Federal funds rate

43 Figure 8: Japan and US Real GDP Growth Rates (percent per year)

7

6

5

4

3

2

1

0

78 -119

-2

-3

Japan United States

44 Figure 9a: Japan Tradables

12.0

10.0

8.0

6.0

4.0 Labor productvity: tradables 2.0 TFP: tradables

0.0

78 -2.019

-4.0

-6.0

45 Figure 9b: Japan Nontradables

7.0

6.0

5.0

4.0

Labor productvity: 3.0 nontradables

2.0 TFP: nontradables

1.0

0.0

-1.01978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004

-2.0

46 Figure 9c: United States Tradables

10.0

8.0

6.0

4.0

Labor productvity: tradables 2.0 TFP: tradables

0.0

-2.01978

-4.0

-6.0

47 Figure 9d: United States Nontradables

4.0

3.0

2.0

1.0 Labor productvity: nontradables TFP: nontradables 0.0

-1.01978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004

-2.0

-3.0

48 Figure 9e: Germany Tradables

8.0

7.0

6.0

5.0

4.0

3.0 Labor productvity: tradables 2.0 TFP: tradables

1.0

0.0

-1.0 1978 -2.0

-3.0

49 Figure 9f: Germany Nontradables

3.5

3.0

2.5

2.0

1.5 Labor productvity: 1.0 nontradables 0.5 TFP: nontradables

0.0

-0.5 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 -1.0

-1.5

-2.0

50 Figure 10a: Bilateral Japan/US Productivity Comparison and Real Exchange Rate: Percent Changes

30.0

20.0

10.0

0.0

1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 -10.0

-20.0

Rel T vs. NT productivity change Real exchange rate change

51 Figure 10b: Bilateral Germany/US Productivity Comparison and Real Exchange Rate: Percent Changes

25.0

20.0 15.0

10.0 5.0

0.0

-5.0 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 -10.0

-15.0 -20.0

-25.0

Rel T vs. NT productivity change Real exchange rate change

52 Figure 11a: Bilateral Japan/US Productivity Comparison and Real Exchange Rate: Levels

0.55

0.35

0.15

-0.05

1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004

-0.25

-0.45

Relative T vs. NT productivity Log real exchange rate

53 Figure 11b: Bilateral Japan/Germany Productivity Comparison and Real Exchange Rate: Levels

0.55

0.35

0.15

-0.05

1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004

-0.25

-0.45

Relative T vs. NT productivity Log real exchange rate

54 CENTER ON JAPANESE ECONOMY AND BUSINESS Working and Occasional Papers

(Papers can be downloaded free of charge at: http://academiccommons.columbia.edu) Last update: March 17, 2009

WORKING PAPERS

2009 2007 278 John P. Tang, Technological Leadership and Late 258 Yasushi Hamao, Takeo Hoshi, and Tetsuji Okazaki, Development: Evidence from Meiji Japan, 1868-1912 Listing Policy and Development of the Tokyo Stock 277 Kenn Ariga and Ryosuke Okazawa, Labor Immobility Exchange in the Pre-War Period in Japan: Its causes and consequences 257 Ryuichi Nakagawa and Hirofumi Uchida, Herd 276 Robert Barsky, The Japanese Asset Price Bubble: A Behavior by Japanese Banks After Financial ‘Heterogeneous’ Approach Deregulation in the 1980s 275 Robert Dekle and Kyoji Fukao, The Japan-U.S. 256 Jie Gan, Collateral, Debt Capacity, and Corporate Exchange Rate, Productivity, and the Competitiveness of Investment: Evidence from a Natural Experiment Japanese Industries 255 Jie Gan, The Real Effects of Asset Market Bubbles: 274 Philip R. Lane, International Financial Integration and Loan- and Firm-Level Evidence of a Lending Channel Japanese Economic Performance, 254 Christian Broda, Nuno Limão, and David E. 273 Joe Peek, The Contribution of Bank Lending to the Weinstein, Optimal Tariffs: The Evidence Long-Term Stagnation in Japan 253 Hugh Patrick, Japan’s Economy: The Idiosyncratic 272 Takeo Hoshi, Satoshi Koibuchi, and Ulrike Schaede, Growth Continues Changes in Corporate Restructuring Processes in Japan, 252 Christian Broda and David E. Weinstein, Defining 1981-2007 Price Stability in Japan: A View from America 271 Diego Comin, An Exploration of the Japanese 251 Terutomo Ozawa, Professor Kiyoshi Kojima’s Slowdown during the 1990s Contributions to FDI Theory: Trade, Structural 270 John Muellbauer and Keiko Murata, Consumption, Transformation, Growth, and Integration in East Asia Land Prices and the Monetary Transmission Mechanism 250 Hiroki Yamakawa, A Practical Analysis of Transfer in Japan Pricing Methodologies for Bilateral Advance Pricing 269 Maurice Obstfeld, The Yen and Japan’s Economy, Arrangements 1985-2007 268 Ryo Kambayashi and Takao Kato, The Japanese 2006 Employment System after the Bubble Burst: New 249 Hugh Patrick, Japan’s Economy: Finally Finding Evidence Its Way to Full Employment and Sustained Growth 267 David E. Weinstein and Christian Broda, Exporting 248 Ulrike Schaede, Competition for Corporate Deflation? Chinese Exports and Japanese Prices Control: Institutional Investors, Investment Funds, and Hostile Takeovers in Japan 2008 247 Ulrike Schaede, The Strategic Logic of Japanese 266 Hugh Patrick, Japan’s Economic Recovery Stalled Keiretsu, Main Banks and Cross-Shareholdings, 265 Richard Katz, A Nordic Mirror: Why Structural Reform Revisited Has Proceeded Faster in Scandinavia Than in Japan 246 Ricardo Caballero, Takeo Hoshi and Anil K 264 Robert Grondine, Observations on the Current State of Kashyap, Zombie Lending and Depressed Corporate Governance in Japan Restructuring in Japan. 263 Nobuyuki Kinoshita, The Economics of Japan's Postal 245 Zekeriya Eser and Joe Peek, Reciprocity and Services Privatization Network Coordination: Evidence from Japanese 262 Keiko Ito and Sébastien Lechevalier, The Evolution of Banks. the Productivity Dispersion of Firms – A Reevaluation of 244 Hugh Patrick, Japan: Another Economic Recovery, Its Determinants in the Case of Japan New Political Terrain. 261 Terutomo Ozawa, History Repeats Itself: Evolutionary 243 Ferenc A. Sanderson, Characteristics of the Hedge Structural Change and TNCs’ Involvement in Fund Industry in Japan. Infrastructure Overseas, Flying-Geese Style 260 Sanghoon Ahn, Kyoji Fukao, and Keiko Ito, 2005 The Impact of Outsourcing on the Japanese and South 242 Mariko Fujii and Makoto Takaoka, Forecasting Korean Labor Markets: International Outsourcing of Skewness in Stock Returns: Evidence from Intermediate Inputs and Assembly in East Asia Frim-Level Data in Tokyo Markets 259 Keiko Ito, Moosup Jung, Young Gak Kim, and 241 Robert A. Myers, Challenges for Japanese Tangjun Yuan, A Comparative Analysis of Universities’ Technology Licensing Productivity Growth and Productivity Dispersion: Offices—What Technology Transfer in the United Microeconomic Evidence Based on Listed Firms from States Can Tell Us Japan, Korea, and China 240 Takatoshi Ito, Political Economy of Competition Policy in Japan: Case of Airline Services

239 Christina L. Ahmadjian, Stability and Change in 217 Adam Posen, It Takes More Than a Bubble to Become Embedded Relationships: Broken Ties in Japanese Japan Automotive Keiretsu 216 Naotaka Kawakami,The difference in taxation on 238 Nada Mora, The Effect of Bank Credit on Asset financial transactions between Japan and the United Prices: Evidence from the Japanese Real Estate States: Can the U.S. system and theory be the model? Boom during the 1980s 215 Naotaka Kawakami, What Does the Consumption Tax 237 Koichi Hamada and Asahi Noguchi, The Role of Mean to Japanese and U.S. Society? Preconceived Ideas in Macroeconomic Policy: Japan’s 214 Tokuo Iwaisako, Stock Index Autocorrelation and Experiences in the Two Deflationary Periods Cross-autocorrelations of the Size-Sorted Portfolios 236 Takatoshi Ito, Monetary Policy Beyond the Zero in the Japanese Market Interest Rate Policy Under Deflation 213 Minoru Kobayashi, Takeshi Hiromatsu, Naoki 235 Hiroyuki Chuma, Takao Kato and Isao Ohashi, Tsubone, Manabu Kurita, and Gosei Ohira, Worker Discontent, Voice, and EI Programs in Japan Economical Impacts on IT to Industries in Japan 234 Masami Imai, Market Discipline and Deposit Insurance 212 William V. Rapp and Mazhar ul Islam, Putting Reform in Japan E-Commerce to Work: The Japanese Convenience Store 233 Takatoshi Ito and Hugh Patrick, Problems and Case Prescriptions for the Japanese Economy: An Overview 211 Mark J. Scher, Policy Challenges and the Reform of 232 Franklin R. Edwards, New Proposals to Regulate Postal Savings in Japan Hedge Funds: SEC Rule 203(b)(3)-2 210 Takao Kato and Katsuyuki Kubo, CEO Compensation 231 Takatoshi Ito and Frederic Mishkin, Monetary Policy and Firm Performance in Japan: Evidence from New in Japan: Problems and Solutions Panel Data on Individual CEO Pay 230 Hugh Patrick, The Japanese Recovery and Growth Not Yet Assured 2002 209 Lee Branstetter and Yoshiaki Nakamura, Has Japan’s 2004 Innovative Capacity Declined? 208 David O. Beim, Japan’s Internal Debt 229 Takatoshi Ito, Interventions and Japanese Economic 207 Kengo Inoue, Choices for Japanese Fiscal Policy Recovery 206 Takero Doi and Takeo Hoshi, Paying for the FILP 228 Christian Broda and David E. Weinstein, Happy News 205 Terutomo Ozawa, Pax-Americana-led from the Dismal Science: Reassessing Japanese Fiscal Macro-Clustering and Flying-Geese Style Catch-Up in Policy and Sustainability East Asia: Mechanisms of Regionalized Endogenous 227 Robert A. Madsen, What Went Wrong Aggregate Growth Demand, Structural Reform, and the Politics of 1990s 204 Robert Dekle and Heajin Ryoo, Exchange Rate Japan Fluctuations, Financing Constraints, Hedging, and 226 Michael Smitka, Japanese Macroeconomic Dilemmas Exports: Evidence from Firm Level Data The Implications of Demographics for Growth and 203 Christina Ahmadjian and Gregory Robbins, A Clash Stability of Capitalisms: Foreign Shareholders and Corporate 225 Lee Branstetter, Is Foreign Direct Investment a Channel Restructuring in 1990s Japan of Knowledge Spillovers? Evidence from Japan’s FDI in 202 David Flath and Tatsuhiko Nariu, Parallel Imports and the United States the Japan Fair Trade Commission 224 Jie Gan, Collateral Channel and Credit Cycle: Evidence 201 David Flath, Taxicab Regulation in Japan from the Land Price Collapse in Japan 200 David Flath, The Japanese Distribution Sector in Economic Perspective: The Large Store Law and Retail 223 Chung I. Wang, The financial strategies of Japanese Density multinational enterprises and internal capital market 199 David Flath, Distribution Keiretsu, FDI and Import 222 Donald Davis and David Weinstein, A Search for Penetration in Japan Multiple Equilibria in Urban Industrial Structure 198 Yasushi Hamao, Jianping Mei, and Yexiao Xu, Idiosyncratic Risk and Creative Destruction in Japan 197 Hee-Joon Ahn, Jun Cai, Yasushi Hamao, and 2003 Richard Y.K. Ho, The Components of the Bid-Ask 221 Christina Ahmadjian and Jaeyong Song, Corporate Spread in a Limit-Order Market: Evidence from the Governance Reform in Japan and South Korea Tokyo Stock Exchange 220 Hugh Patrick, Evolving Corporate Governance in Japan 196 Donald R. Davis and David E. Weinstein, 219 Minako Fujiki, Inflation Targeting Discussions in Japan Technological Superiority and the Losses From – unconventional monetary policy under deflation: How Migration People Have Argued; Why the BoJ Opposes Adoption 195 Linda Edwards and Margaret Pasquale, 218 Adam Posen and Kenneth Kuttner, The Difficulty of Women’s Higher Education in Japan: Family Discerning What’s Too Tight: Taylor Rules and Japanese Background, Economic Factors, and the Equal Monetary Policy Employment Opportunity Law 194 Andrew Carverhill and Ronald Schramm, International Market Segmentation, and the CME Quanto Nikkei Future

2001 163 Hiroshi Amari, Pharmaceuticals: Takeda 193 Terutomo Ozawa, The hidden side of the flying geese 162 Christos Cabolis, Semiconductors: NEC catch-up model: Japan’s dirigiste institutional setup and a deepening financial morass 1998 192 Donald Davis and David Weinstein, Bones, Bombs and 161 Hiroshi Amari, Pharmaceuticals: Merck Break Points: The Geography of Economic Activity 160 William V. Rapp, Gaining and Sustaining Long-Term 191 William V. Rapp, Nationwide Financial Services Advantage Through Information Technology: The 190 Lee Branstetter, Is Foreign Direct Investment a Channel Emergence of Controlled Production of Knowledge Spillovers? Evidence from Japan’s FDI in 159 Mark Tilton, Antitrust Policy and Japan’s International the U.S. Steel Trade 189 Christina Ahmadjian and Patricia Robinson, 158 Takao Kato, Participatory Employment Practices in Downsizing and the Deinstitutionalization of Permanent Japan: Past, Present and Future Employment in Japan 157 Ulrike Schaede, Self-Regulation and the Sanctuary 188 Christina Ahmadjian, Changing Japanese Corporate Strategy: Competitive Advantage through Domestic Governance Cooperation by Japanese Firms 187 Kazuo Sato, From Fast to Last: The Japanese Economy 156 Mariko Sakakibara, Knowledge Sharing in in the 1990s Cooperative Research and Development 186 Hugh Patrick, From Cozy Regulation to Competitive 155 Shigeru Asaba and Marvin Lieberman, Why Do Firms Markets: The Regime Shift of Japan’s Financial System Behave Similarly? A Study on New Product Introduction 185 Takao Kato, The End of Lifetime Employment in in the Japanese Soft-Drink Industry Japan? Evidence from National Surveys and Field 154 Hiroshi Ishida, Kuo-Hsien Su and Seymour Research Spilerman, Models of Career Progression in Japanese 184 Takao Kato, The Recent Transformation of and U.S. Organizations Participatory Employment Practices in Japan 153 Hugh Patrick, Japan’s Economic Misery: What Next? 183 William Rapp, Nomura Research Institute 152 David Flath, Japanese Technology Policy 182 Robert Dekle, Demographic Destiny, Per Capita 151 David Flath, A Perspective on Japanese Trade Policy Consumption, and the Japanese Saving-Investment and Japan-US Trade Friction Balance 150 David Flath, Japan’s Labor Unions 149 David Flath & Tatsuhiko Nariu, Demand Uncertainty 2000 and Price Maintenance 181 Maria Vassalou, The Fama-French factors as proxies for 148 Frederic S. Mishkin, Promoting Japanese Recovery fundamental economic risks 147 Hugh Patrick, Why I Expect Japan to Prevail: 180 Yasushi Hamao and Jianping Mei, Living With the Ruminations on Morishima “Enemy”: An Analysis of Foreign Investment in the 146 Hugh Patrick, The Causes of Japan’s Financial Crisis Japanese Equity Market 145 Ryoichi Mikitani and Patricia Hagan Kuwayama, 179 Yasushi Hamao and Takeo Hoshi, Bank Underwriting Japan’s New Central Banking Law: A Critical View of Corporate Bonds: Evidence from Japan after the 144 Koichi Hamada, The Japanese Big Bang as a Unilateral Financial System Reform of 1993. Action 178 William Rapp, International Retail Banking: 143 Ellie Okada, Financial Control through Japan’s Main The Citibank Group Bank System and the Japanese Accounting System 177 William Rapp, Automobiles: Toyota Motor Corporation 142 Edward J. Lincoln, Japan’s Economic Mess 176 Shingo Nakazawa, Corporate Investment in Japan: 141 Hugh Patrick, The Development of Studies of the How Important are Financial Factors? Japanese Economy in the United States: A Personal 175 Nobuyoshi Yamori & Narunto Nishigaki, Electronic Odyssey Money Projects in Japan 1997 174 William Rapp, Steel: Nippon Steel, K.K. 140 Shigeyuki Goto, Study on the Interactive Approach between Insurance and Capital Markets for Catastrophe 1999 Risks 173 Nobuhiko Hibara, Food Retailing: Ito-Yokado Group 139 Patricia Hagan Kuwayama, Postal Banking in the 172 William V. Rapp, Steel: Tokyo Steel, K.K. United States and Japan: A Comparative Analysis 171 Yasushi Hamao, Frank Packer & Jay Ritter, 138 Christina L. Ahmadjian, Network Affiliation and Institutional Affiliation and the Role of Venture Capital: Supplier Performance in the Japanese Automotive Evidence from Initial Public Offerings in Japan Industry 170 William V. Rapp, Retail Banking: Sanwa Bank 137 Christina L. Ahmadjian & James R. Lincoln, 169 William V. Rapp, Life Insurance: Meiji Life, K.K. Changing Firm Boundaries in Japanese Auto Parts 168 Robert Dekle & Koichi Yamada, On the Development Supply Networks of Rotating Credit Associations in Japan 136 Fumio Hayashi, The Main Banking System and 167 Kazuo Sato, Japan at a Crossroads Corporate Investment: An Empirical Reassessment 166 Kazuo Sato, Japanese-Style Capitalism 135 Yasushi Hamao & Takeo Hoshi, Bank Underwriting of 165 David Weinstein and Robert Lawrence, Trade and Corporate Bonds: Evidence from Japan after 1994 Growth: Import-Led or Export-Led? Evidence from 134 Klaus Wallner, Implicit Contracts between Regulator Japan and Korea and Firms: The Case of Japanese Casualty Insurance 164 David Weinstein, Historical, Structural, and 133 Klaus Wallner, Commodity Bundling in Japanese Macroeconomic Perspectives on the Japanese Economic Non-Life Insurance: Savings-Type Products as Crisis Self-Selection Mechanism 132 Patricia Hagan Kuwayama, Credit Channels and the 104 Schon Beechler, Scott Shane & Sully Taylor, Ware Small Firm Sector in Japan Ware Nihonjin But We’re Not All Alike: How Japanese 131 Terry A. Marsh & Jean-Michel Paul, BIS Capital Managers Champion Innovation Regulations and Japanese Bank’s Bad Loan Problems 103 Schon Beechler & Michelle Krazmien, The 130 Yoshinobu Shiota, Update on Japanese Bad Debt Relationship Between Expatriates, Parent Restructuring Company-Affiliate Integration and HRM Control in 129 Christina L. Ahmadjian, Japanese Auto Parts Supply Overseas Affiliates of Japanese and American MNCs Networks and the Governance of Interfirm Exchange 102 Schon Beechler, Michelle Najjar, B.C. Ghosh, 128 Takatoshi Ito, Richard K. Lyons & Michael T. Sukiswo Dirdjosuparto & Sieh Mei Ling, Influences Melvin, Is There Private Information in the FX Market? on Affiliate HRM Systems in Japanese MNCs in The Tokyo Experiment Southeast Asia 101 Schon Beechler, John Stephan, Vladimir Pucik & 1996 Nigel Campbell, Decision Making Localization and 127 Yukiko Ohara, Japan’s Banking: The Darkest Hour Decentralization in Japanese MNCs: Are There Costs of Before Dawn. The Future is in the Hands of MoF Leaving Local Managers Out of the Loop? 126 Yasushi Hamao & Narasimhan Jegadeesh, An Analysis of Bidding in the Japanese Government Bond 1995 Auctions 100 Yasushi Hamao, Living with the "Enemy": An Analysis 125 Terry A. Marsh & Jean-Michel Paul, Japanese Banks' of Foreign Investment in the Japanese Equity Market Bad Loans: What Happened? 99 Yasushi Hamao, Japanese Government Bond Auctions: 124 Hirotaka Yamauchi & Takatoshi Ito, Air Transport The U.S. Experience Policy in Japan 98 Hugh Patrick, Crumbling or Transforming? Japan's 123 Shinji Takagi, The Japanese System of Foreign Economic Success and its Postwar Economic Institutions Exchange and Trade Control, 1950-1964 97 Peter Drysdale, The Question of Access to Japanese 122 David E. Weinstein, Foreign Direct Investment and Market Keiretsu: Rethinking US and Japanese Policy 96 Hugh Patrick, Northeast Asia: The Role of International 121 Masatsugu Tsuji, Deregulation and Privatization of the and Regional Economic Institutions and Regimes Fiscal Investment and Loan Program 95 Kazuo Sato, Bubbles in Japan's Stock Market: A 120 Koichi Hamada, Consumers, the Legal System and Macroeconomic Analysis Product Liability Reform: A Comparative Perspective 94 William V. Rapp, Software Policies and Hardware between Japan and the United States Competition: The Impact of Government, Industry and 119 David Flath, Japanese Regulation of Truck Transport Users on the Development of Japan's Software Industry 118 C.R. McKenzie, The Commercial Paper Market in Japan 93 David Flath, The Keiretsu Puzzle 117 Hideo Taki, The Gas Industry in Japan 92 Seymour Spilerman, Hiroshi Ishida & Kuo-Hsien Su, 116 Merit E. Janow, Policy Approaches to Economic Educational Credentials and Promotion Prospects in a Deregulation and Regulatory Reform Japanese and an American Organization 115 Arthur J. Alexander, Domestic Aviation in Japan: 1994-1991 Responding to Market Forces Amid Regulatory 91 Seymour Silerman, Hiroshi Ishida, Stratification and Constraints Attainment in a Large Japanese Firm 114 D. Eleanor Westney, The Japanese Business System: 90 Yasushi Hamao & Joel Hasbruck, Securities Trading Key Features and Prospects for Change In the Absence of Dealers 113 Robert Dekle, Endaka and Japanese Employment 89 Fumio Hayashi, Japan's Saving Rate: An Update Adjustment 88 Frank Packer, The Disposal of Bad Loans in Japan: A 112 G. Andrew Karolyi & René M. Stulz, Why do Markets Review of Recent Policy Initiatives Move Together? An Investigation of U.S.-Japan Stock 87 Anthony Iaquinto, Can Winners be Losers? The Case of Return Comovements the Deming Prize for Quality and Performance among 111 Jun-Koo Kang & René M. Stulz, Why is There a Home Large Japanese Manufacturing Firms Bias? An Analysis of Foreign Portfolio Equity 86 C. Tait Ratcliffe, Medium-Term Prospects for the Ownership in Japan Japanese Economy and for U.S.-Japan Relations 110 Takeo Hoshi, Bank Organization and Screening 85 Mark Scher & Schon Beechler, Japanese Banking in Performance the U.S.-From Transient Advantage to Strategic Failure 109 John W. Cooney, Jr., Kiyoshi Kato & James S. 84 Schon Beechler, Scott Shane & Sully Taylor, Schallheim, Public Placements of Seasoned Equity Organizational Variation in Championship Behavior: Issues in Japan The Case of Japanese Firms 108 Jun Cai, K.C. Chan & Takeshi Yamada, The 83 Schon Beechler & Tony Iaquinto, A Longitudinal Performance of Japanese Mutual Funds Study of Staffing Patterns in U.S. Affiliates of Japanese 107 Jun-Koo Kang & Takeshi Yamada, The Japanese Multinational Corporations Market for Corporate Control and Managerial Incentives 82 Takatoshi Ito, Short-run and Long-run Expectations of 106 Ravi Jagannathan, Keiichi Kubota & Hitoshi Dollar/Yen Exchange Rate Takehara, The CAPM with Human Capital: Evidence 81 Edward Lincoln, Fundamental Issues in the United from Japan States-Japan Economic Relationship 105 Schon Beechler, Michelle Najjar Kristen Stucker & 80 Fumio Hayashi, Is the Japanese Extended Family Allan Bird, Japanese-style versus American-style Altruistically Linked? Human Resource Management Overseas: Examining Whether the Data Support the “Facts” 79 Schon Beechler & Sheri Ranis, The Prospects for 52 Robert Dekle, Alternative Estimates of Japanese Saving Industrial Cooperation Between the United States and and Comparisons with the US Japan 51 Ellen R. Auster, Penetration Without Dependence: A 78 Marcus Noland, US – Japan Trade Friction Network Analysis of Japanese Economic Activity in the 77 Frank Packer, The Role of Long-Term Credit Banks U.S. Within the Main Bank System 50 Hugh Patrick, Japan's Financial System and the 76 John Campbell & Yasushi Hamao, Changing Patterns Evolving Role of Main Banks in Corporate Financing and the Main Bank System in 49 Anthony L. Iaquinto & Schon L. Beechler, The Japan Performance Implications of Asset versus Transactional 75 Hugh Patrick, The Relevance of Japanese Finance and Advantages of MNEs its Main Bank System 74 Michael Smitka, Contracting Without Contracts: How 1990 the Japanese Manage Organizational Transactions 48 Ross Garnaut, The Market and the State in Economic 73 Takatoshi Ito & Keiko Nosse Hirono, The Efficiency Development: Some Questions from East Asia and of the Tokyo Housing Market Australia 72 David Flath & Tatsuhiko Mariu, Is Japan’s Retail 47 Kazuo Sato, Japan’s Resource Imports Sector Truly Distinctive? 46 Hugh Patrick, Section 301 and the U.S. Japan Economic 71 Linda Edwards, The Status of Women in Japan: Has the Relationship: Reflections on Kuroda Equal Opportunity Law Made a Difference? 45 Louis K.C. Chan, Yasushi Hamao & Josef 70 David Flath, Keiretsu Shareholding Ties: Antitrust Lakonishok, Fundamentals and Stock Returns in Japan Issues 44 Peter Drysdale, Change and Response in Japan’s 69 Yasushi Hamao & Joel Hasbrouck, Securities Trading International Economic Policy in the Absence of Dealers: Trades and Quotes on the 43 David Flath, Shareholding Interlocks in the Keiretsu, Tokyo Stock Exchange Japan’s Financial Groups 68 Schon Beechler & Allan Bird, The Transfer of Human 42 Edward J. Lincoln, The Controversy Over Japan’s Low Resource Management Overseas: An Exploratory Study Manufactured Imports of Japanese and American Maquiladoras 41 Edward J. Lincoln, Japan’s Role in Asia Pacific 67 Charles Hall, Yasushi Hamao, & Trevor Harris, Cooperation: Dimension, prospects, and Problems A Comparison of Relations Between Security Market 40 Ellen R. Auster, Bringing a Network Perspective into Prices, Returns and Accounting Measure s in Japan and Research on Technological Transfers and Other the US. Interorganizational Relationships 66 Schon Beechler & Allan Bird, The Best of Both Worlds? An Exploratory Study of Human Resource 1989 Management Practices in US Based Japanese Affiliates 39 Hong W. Tan & Atsushi Seike, Pensions and Labor 65 Michael Smitka, The Decline of the Japanese Turnover in Japan Automobile Industry: Domestic and International 38 Maurice J. Wilkinson, Inventory Behavior and Implications Economic Instability in Japan 64 Hugh Patrick, Comparisons, Contrasts, and 37 Michael J. Smitka, American Management: Reform or Implications from the Financial Development of Japan, Revolution? The Transfer of Japanese Management Korea and Taiwan Technology to the U.S. 63 Theodore C. Bestor, Visible Hands: Auctions and 36 Koichi Hamada, The Causes and Consequences of Institutional Integration in the Tsukiji Wholesale Fish Japan’s High Savings Ratio Market, Tokyo 35 Ellen R. Auster, The Relationship of Industry Evolution 62 Frank Packer & Marc Ryser, The Governance of to Patterns of Technology Linkages, Joint Ventures, and Failure: An Anatomy of Corporate Bankruptcy in Japan Direct Investment Between the U.S. and Japan 61 William Rapp, Japanese Multinationals: An 34 Masako N. Darrough & Trevor S. Harris, Do Evolutionary Theory and Some Potential Global Political Management Forecasts of Earnings Affect Stock Prices Implications for the 1990’s in Japan? 60 David Flath & Tatsuhiko Nariu, The Complexity of 33 Phillip A. Klein & Geoffrey H. Moore, Analyzing Wholesale Distribution Channels in Japan Leading and Coincident Indicators for Pacific Basin 59 David Flath, Indirect Shareholding Within Japan’s Countries Business Groups 32 Geoffrey H. Moore & John P. Cullity, Growth Cycle 58 Tatsuo Hatta & Toru Ohkawara, Commuting and Signals as Inflation Indicators for Major Industrial Land Prices in the Tokyo Metropolitan Area. Nations 57 John Campbell & Yasushi Hamao, Predictable Stock 31 Takatoshi Ito, Foreign Exchange Rate Expectations: Returns in the United States and Japan: A Study of Micro Survey Data Long-Term Intergration 30 Takatoshi Ito, Is the Bank of Japan a Closet Monetarist? 56 Hugh Patrick, Peace and Security on the Korean 29 David Flath, The Economic Rationality of the Japanese Peninsula: Reflections on the Economic Dimension Distribution System 55 Yasushi Hamao & Ronald Masulis, The Effect of the 28 Hugh Patrick, Declining Industries, Mechanism of 1987 Stock Crash on International Financial Integration Structural Adjustment and Trade Policy in Pacific Basin 54 Anthony L. Iaquinto, Japanese Investment in the Border Economics Region of the United States and Mexico 27 Susuma Fukuda, The Fiscal Investment and Loan 53 John Campbell & Yasushi Hamao, Monetary Policy System and the Term Structure of Interest Rates in Japan 26 Shoichi Saba, The Japanese Cooperation and its Recruitment, Job Training, Wage Structure and Job Management Separation 25 Peter Drysdale & Ross Garnaut, A Pacific Free Trade 12 Jacob Mineer & Yoshio Higuchi, Wage Structures and Area? Labor Turnover in the U.S. and in Japan 24 James Moore Jr., The United States and Japan: 11 Fumio Hayashi & Takatoshi Ito, Housing Finance Competition and Cooperation Imperfections and Private Saving: A Comparative Simulation Analysis of the United States and Japan 1988 10 Hugh Patrick, The Management of the United 23 Akio Mikuni, Japan’s Financial Power] States-Japan Trade Relationship and its Implications for 22 Ariyoshi Okumura, The Future Role of Tokyo’s the Pacific Basin Financial Market 9 Michael Smitka, Japanese Labor Market and 21 Robert Dekle, The Relationship Between Defense Subcontracting Spending and Economic Performance in Japan 8 Takatoshi Ito, The Intra-Daily Exchange Rate 20 Hugh Patrick, Explaining the Japanese Financial Dynamics and Monetary Policies after the G5 Agreement System: A Review of the Bank of Japan’s Recent Volume 7 Yoshio Higuchi, Labor Force Withdrawal, Re-entry and 19 Mototada Kikkawa, Problems of the U.S. Trade Wages by Educational Attainment in Japanese Women Structure 6 Kazuo Sato, Savings and Investment in Japan 18 Hugh Patrick & Frances Rosenbluth, Japan’s 5 Koichi Hamada & Hugh Patrick, Japan and the Industrial Structure in Crisis: National Concerns and International Monetary Regime International Implications 17 David Flath, Why are There So Many Retail Stores in Japan? 1986 16 Richard Baldwin, Some Empirical Evidence on 4 Kazuo Sato, Econometric Models of the Japanese Hysteresis in Aggregate U.S. Import Prices Economy 15 Frances Rosenbluth, The Political Economy of 3 Hugh Patrick & Thomas Rohlen, Japan’s Small-Scale Internationalizing the Japanese Financial System: The Family Enterprises Case of the Bond Market 2 Richard Baldwin & Paul Krugman, Market Access 14 Robert Dekle, Do the Japanese Elderly Reduce Their and International Competition: A Simulation Study of Total Wealth? 16K Random Access Memories 1 Hugh Patrick, Japanese High Technology Industrial 1987 Policy in Comparative Context 13 Yoshio Higuchi, A Comparative Study of Japanese Plants Operating in the U.S. and American Plants: OCCASIONAL PAPERS 2001 2004 47 Shigeyuki Goto, E-Commerce in the Japanese 56 Shigeyuki Goto, A Behavioral Risk Management Non-Life Insurance Market System 46 Yasushi Ueno, Effectiveness and Importance of

Leadership in the Changing Period 2003 55 Shigeyuki Goto & Hiroshi Hayakawa, Building the corporate risk control system with some viewpoints on 2000 the risk psychology 45 Yotaro Kobayashi, Japan’s Changing Corporate 54 Ryozo Hayashi, Economic Reform: View from Structure METI 1999 53 Junji Narita, The Economic Consequences of the 44 Shunji Fukukawa, Japan’s Challenge for Economic ‘Price Keeping Operation’ in the Japanese Stock Revitalization Markets 43 Patricia Hagan Kuwayama, Lessons from Bad 52 Shigeyuki Goto, Non-Life Insurance, E-Commerce, Experience with Banking Systems: The United States and the Importance of Proper Risk Communication and Japan 51 Hugh Patrick, Japan’s Mediocre Economic Performance Persists and Fundamental Problems 1998 Remain Unresolved 42 Junichi Ujiie, Investment Banking in Japan 50 Takao Sase, The Irresponsible Japanese Top 41 Toyoo Gyohten, The Japanese Financial System: Management Under the Cross-Shareholding Restructuring for the Future Arrangement 40 William E. Franklin, Careers in International/Asia Pacific Business: Perspectives of an Experienced Japan Hand 2002 39 Jay W. Chai, Wounded Asia vs. the IMF: Where do 49 Naotaka Kawakami, The Impact of the Post Cold War we go from here? Crises on the Political Economy of Japan 38 Lawrence H. Summers, The US-Japanese Stake in a 48 Yasuhisa Shiozaki, Can Japan’s Ailing Banking Free and Open Asian Capital Market System Be Cured? 37 Yuichiro Nagatomi, The Challenges Before Industrialized Countries 36 Henry Kaufman, The Yen, The Dollar and The Euro 21 Yoshitaka Fujitani, Challenges Facing Japanese Steel in Today's Global Economy 20 Kenichi Ohmae, Japanese Corporate Strategy in Crisis 19 Shijuro Ogata, The Japanese Economy and the 35 Yuji Suzuki, Strategy Towards the “Big Bang” The Aftermath of Its Unusual Recession Industrial Bank of Japan’s Approach 18 Jeffrey Garten, U.S.-Japan Relations: 34 Maryann Keller, International Automobile Accomplishments, Next Steps, Future Considerations Production: How Will Firms Compete in the 21st 16 Susumu Yoshida, Agenda for Japanese Business in the Century? Global Economy 15 Saburo Okita, Japan's Role in a Changing World 1997 Economy 33 Hugh Patrick, How the Japanese Financial System 14 Takeo Siina, Selling IBM in Japan, Selling Japan in and Its Main Bank System Have Dealt with Generic IBM Issues of Financial Banking 13 Hugh Patrick, Some Thoughts on Japan's Financial 32 Patricia Hagan Kuwayama, Comments on Japanese Mess Economic Policy 12 Yoshitoki Chino, A Monologue on Japan's Financial 31 Roger M. Kubarych, The Yen and the Dollar: Market Irrational Exuberance? 11 Jeffrey Garten, Thinking About World Order: 30 Robert Pitofsky, Competition Policy in America, Japan and Germany in the 1990's Communications Industries: New Antitrust 10 Nobuo Ohashi, Innovation and Technical Approaches Development in the Japanese Steel Industry 29 Masaya Miyoshi, Japan’s Capitalism in Systemic 9 Yuzaburo Mogi, Problems and Solutions to Japanese Transformation Investment Abroad 28 Yasuo Kanzaki, Japan’s “Super” Big Bang: 8 Hugh Patrick, One World, Two Worlds or Three? Hashimoto’s Make-or-Break Gamble Reflections on the New International Economic Order 7 Kensuke Hotta, Deregulation of the Japanese 1996 Financial Markets and the Role of Japanese Banks 6 Hironobu Shibuya, Taking Responsibility: Japanese 27 Sheldon Weinig, Can an American Entrepreneur Work Companies and Corporate Citizenship for a Japanese Company and Be Effective and Happy? 5 Sam Kusumoto, Going Global Without Going Broke 26 Takeshi Nagano, The History and Future of Japanese

Management 25 Isao Matsuura, Japanese Banks in Transition: 1990-1989 Problems and Prospects 4 Yuchichiro Nagatomi, The Financial System and 24 Max C. Chapman, Jr., A Viable Strategy for Japanese Global Socioeconomic Change Securities Firms in the United States 3 Yoshio Terasawa, The M.I.G.A. and its Mission 2 Eiji Umene, The United States-Japan Relationship in 1995-1991 the Rapidly Changing World Environment 1 Nobutoshi Akao & Joseph A. Massey, Agenda for a 23 Yotaro Kobayashi, The Japanese Corporation in Pacific Partnership: A Japanese-American Dialogue Transition: Current Challenges and Outlook 22 Hideo Ishihara, Re-evaluating the Japanese Corporate System CENTER ON JAPANESE ECONOMY AND BUSINESS Working and Occasional Papers Order Form

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