An Exploration of the Japanese Slowdown During the 1990S

CENTER ON JAPANESE ECONOMY AND BUSINESS

Working Paper Series February 2009, No. 271

An Exploration of the Japanese Slowdown during the 1990s

Diego Comin

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

COLUMBIA UNIVERSITY IN THE CITY OF NEW YORK An Exploration of the Japanese Slowdown during the 1990s

Diego Comin Harvard University and NBER

November 2008

1. Introduction

Two striking aspects of the Japanese stagnation of the 1990s are its severity and especially its persistence. Over the 1983-1991 period, TFP grew at a more than respectable rate of 2.4 percent. It fell to an average of 0.2 percent for 1991-2000. We know from Cogley and Nason (1995) that the persistence in real business cycles models comes from the persistence of the shocks. However, none of the shocks that arguably have hit the Japanese economy seem to have persisted for a decade. This implies that a successful account of the Japanese stagnation requires a model where the propagation mechanisms generate a signi…cant amount of persistence. One such approach is to modify a simple real business cycle model to allow for endogenous productivity as in Comin and Gertler (2006). This approach provides a uni…ed explanation for the co-movements of TFP, technology di¤usion and R&D over the short and medium term. To capture endogenous productivity dynamics, Comin and Gertler (2006) and use a variation of Romer’s (1990) model of R&D expanding the variety of

I would like to thank for very helpful comments my dicussant Gialuca Violante, the editors Koichi Hamada, Anyl Kashyap and David Weinstein and the participants at the ESRI workshop at Columbia University, and, for assistance, the ESRI. All remaining errors are my own.

1 intermediate goods extended to allow for an endogenous rate of adoption of new technologies. Building on the evidence from Hall (1997) and others, they use (low persistence) wage markup shocks as source of ‡uctuations. They show that, a version of the model calibrated to match the US economy, can closely reproduce US postwar ‡uctuations in output, consumption, hours worked, investment, TFP, R&D and the relative price of capital at the high and medium term frequencies. In this paper, I use the Comin and Gertler (2006) model to explore whether it can amplify and propagate the wage markup ‡uctuations observed in Japan over the 90s to generate the Japanese productivity slowdown. As in Comin and Gertler (2006), rather than taking a strong stand in the fundamental nature of the shocks, we take the wage markup as a reasonable reduced form measure of several shocks that can be represented as markups. This paper is inspired by Hayashi and Prescott (2002) who show that a real business cycle model with TFP shocks can reproduce the Japanese ‡uctuations over the 1990s in output, consumption and investment. This implies that standard macro models can go a long way in explaining why Japan su¤ered its growth slowdown conditional on the evolution of TFP. However, technology and TFP are to a large extent endogenous to the agents decisions. Thus, the follow up question is why Japanese TFP was depressed during the 90s. In section 2, I explore in more detail the Japanese performance during the 90s. Two interesting …ndings are that R&D expenditures stopped growing and that the speed of di¤usion of new technologies slowed down (to the point that South Korea surpassed Japan in both the di¤usion of computers and internet). This suggests that the endogenous technology mechanisms played a signi…cant role in the propagation of the shocks that caused the Japanese slowdown in productivity. Section 3 describes the model and the intuition of why it generates pro-cyclical and highly persistent ‡uctuations in productivity despite the fact that shocks are relatively transitory. Section 4 presents the impulse responses to a wage markup shock and the simulations of the Japanese economy once I hit it with the observed series of markup shocks. The model does a good job in reproducing the evolution of output, consumption, investment, TFP and hours worked in Japan during the lost decade, specially up to 1998. During the last two years of the decade, the propagation mechanisms in the model seem

2 to run out of steam, while the Japanese economy continued to deteriorate. However, I think it is fair to say that overall the model provides a powerful propagation mechanism to the ‡uctuations in the markups we saw in Japan. Section 5 concludes.

2. Facts

In this section, I present a series of facts with two purposes in mind. First, to describe the main features of the data that I consider a model of the Japanese slowdown should account for. Second, to motivate the mechanisms built in in the model. Figure 1 presents the evolution of GNP per working age person1 detrended with a linear trend given by the average post-war growth rate of the same variable in the U.S. which has been approximately 2.4% per year. In this and most of the subsequent …gures, I take 1990 as the base year. This Figure illustrates clearly the magnitude of both the post-war catch up and the slow down of growth during the 1990s. between 1960 and 1990 per working age person GNP grew at an average rate of 4.6% per year. This rate declined to 0.7% per year during the lost decade. Hayashi and Prescott (2002) show that the slowdown in TFP growth (or GNP growth) during the 1990s was not due to a constraint in investment due to a lack of capital to …nance pro…table investment projects. In particular, they show that there was no decline during the 1990s in investment by non-…nancial corporations as a share of GDP. The collapsed in the banking system, however, forced …rms to …nd other sources of funds di¤erent from the bank loans that had helped …nance 52% of the investment by non- …nancial corporations during the 80s. These were a higher corporate savings rate and the sale of the land and …nancial assets that had been accumulated during the 80s. Hayashi and Prescott (2002) also show that small …rms, which rely more on bank loans, used cash and deposits as a bu¤er to …nance their investment. As argued by Hayashi and Prescott (2002), the slowdown in growth is driven by-an- large by the slowdown in TFP growth. Figure 2 compares the evolution of TFP in Japan and the U.S. both detrended at the post-war rate of 1.02% per year. Despite the impressive performace of US TFP during the 60s, Japan closed a signi…cant part of the gap with the

1 That is de…ned as persons with ages between 20 and 69 years.

3 U.S. Between 1970 and 1990, Japan continued to close the gap while growing faster than the US long-run average. The 1990s, however, is a di¤erent story. While US managed to approximately sustain its long-run TFP growth, Japan’s TFP grew signi…cantly slower at 0.6% per year. One interesting question raised by Fukao et al. (2004) concerns whether the slow down in Japanese TFP growth was driven by the performance of the service or manufacturing sectors. Figure 3 addresses this issue and shows that manufacturing was the main culprit for the TFP slow down during the 90s. Figure 4 provides more disaggregated evidence of the three largest sectors whithin durable manufacturing. These are general machinery, other electrical machinery and motor vehicles. The slow down in TFP growth in these three sectors is quite dramatic. ‘Other electrical machinery’was the sector with fastest growing TFP between 1970 and 1990 while, for most of the 1990s, TFP was ‡at. Motor vehicles did not experience any TFP growth during the 90s, while in general machinery the growth rate was negative. Two of the most signi…cant sources of TFP growth in developed economies are innovation and technology adoption. Figures 5 and 6 show that Japanese R&D spending also su¤ered a signi…cant slow down after 1990. Figure 7 shows that the growth rate of real wages in research activities slowdown more than in the rest of the sectors. This suggests slower demand for scientists and engineers in R&D than in other activities. Figures 8 and 9 show the di¤usion of computers and internet in Japan and compares it to the di¤usion in the U.S. and in South Korea. Computers and the internet are the most signi…cant technologies during the 1990s. Their signi…cance resides partly in their generality which makes them important to many activities in many di¤erent sectors of the economy. Thus, they provide a good proxy for the overall technology adoption in the economy. During the 1990s the gap in computer adoption between Japan and the U.S. increased. The slow speed of computer adoption in Japan is re‡ected by the fact that Korea, a signi…cantly poorer economy, surpassed Japan in computers per capita. An almost identical picture emerges from the di¤usion of the internet. The question that these …ndings beg to ask is why did R&D and the speed of adoption decline in Japan. It is natural to think that this decline was driven by a decline in the pro…tability of the investments to improve technology. But, what drove this lower

4 pro…tability? A priori, there are many possible answers to this question. One is that aggregate demand was lower over this period. Aggregate demand can also be driven by a variety of shocks. Gali, Gertler and Lopez-Salido (2007) (GGLS, henceforth) present a variable, that they call the total mark up, which can be thought as a reduced form of several shocks which a¤ect aggregate demand. Speci…cally, they de…ne the total markup (or markup, in short) as the wedge between the marginal product of labor and the marginal rate of substitution between consumption and leisure. To compute this variable it is necessary to make some parametric assumptions about the utility and production functions. I assume a Cobb-Douglas production function and a unit elasticity between consumption and leisure. Of course, demographic and other very slow moving variables may be a¤ecting this measure of the markup. So, I …lter these using a Band-Pass …lter that keeps cycles with periods between 2 and 100 quarters. Gali, Gertler and Lopez-Salido (2007) show that the markup is highly counter-cyclical at business cycle frequencies. Comin and Gertler (2006) show that it is highly countercyclical also at the medium term (i.e. ‡uctuations associated to cycles with periods between 8 and 50 years). Figure 10 plots the …ltered markup for Japan. In this …gure we can see that the Japanese wage markup was high during the …rst half of the 70s and between 1988 and 2000. This is the variable we will use in section 4 to measure the disturbances in the Japanese economy.

3. The Model

I now develop a model of medium term business ‡uctuations. The model is annual as opposed to quarterly because I am interested in capturing ‡uctuations over a longer horizon than is typically studied. To this end, I abstract from a number of complicating factors that would otherwise might be useful for understanding quarterly dynamics, such as money and nominal rigidities. The Comin and Gertler (2006) model is a two-sector version of a reasonably conventional real business cycle model, modi…ed to allow for, among other things, endogenous productivity and endogenous countercyclical markups. Procyclical entry and exit by …- nal goods …rms induces procyclical variation in the degree of competition and, hence, countercyclical variation in (…nal goods) price markups, in the spirit of Rotemberg and

5 Woodford (1995). The precise formulation we use, though, is based on Gali and Zilibotti (1995). Final goods producers use intermediate goods as inputs, along with capital and labor. As in Romer (1990), creation of new specialized intermediate goods, stemming from R&D is the source of technological change. As I noted in the introduction, we modify the Romer framework to allow for an endogenous rate of adoption of new technologies, along with endogenous R&D. By doing so, I can allow for empirically reasonable di¤usion lags but still generate endogenous medium term swings in productivity. Roughly speaking, endogenous R&D permits disturbances to have permanent e¤ects on productivity movements, while endogenous adoption rates accelerate the transition of productivity to the new steady state. Because the model has two sectors, consumption goods versus capital goods, we are able to distinguish between embodied and disembodied technological change. Household’s are conventional, except I allow them a bit of market power in labor supply in order to motivate a wage markup. I then allow for exogenous variation in this market power This mechanism combined with the entry/exit mechanism in the goods market permits the model to generate countercyclical movements in both price and wage markups that are consistent with the data. As I alluded to earlier, this simple structure is meant as a stand-in for a richer model of markup variation.

3.1. Main Mechanisms

Rather than laying formally the whole model,2 next I just explain in detail the mechanisms that propagate the wage markup shocks generating large and persistent ‡uctuations in productivity and TFP. I do that by explaining the intuition behind the key equilibrium relationships in the model.

In our model, wage markup shocks, w;t, increase or reduce the wedge between the wage, Wt; and the marginal rate of substitution between labor and consumption, (Lt) Ct.

Wt = (Lt) Ct (1) w;t

2 For that, see Comin and Gertler (2006).

6 A positive wage markup, reduces, ceteris paribus, the number of hours that the repre- sentative worker supplies for a given wage rate. This reduction in the number of hours sup- plied in the market causes a decline in aggregate output. The expectations about future lower output also drive a decline in aggregate consumption and investment. This reduces the pro…ts earned by intermediate goods producers in both the capital and consumption goods sector, x;t for x = c; k: The value of a company that produces an intermediate good, Vx;t; is given by the discounted stream of earnings from selling intermediate good:

1 Vx;t = x;t + R Et Vx;t+1 (2) t+1 f g where Rt+1 is the discount rate between t and t + 1; and is the probability the good has not exogenously disappeared the next period. At times when aggregate demand is lower, so are current and future pro…ts and the value of intermediate good producers is also lower. When intermediate goods are …rst invented, they are not yet useable for production. For that, the inventor must succeed in making the good useable for production (i.e. adopt it). The more output he invests in adopting the good, the higher the probability he will succedd in adopting it. The value of an unadopted technology, Jx;t, can be de…ned by the following Bellman equation:

1 Jx;t = max Hx;t + Rt+1[Jx;t+1 + (x;tHx;t)(Vx;t+1 Jx;t+1)] (3) Hx;t

where Hx;t is the amount of output invested in adopting the intermediate good, (:)

(with 0 > 0; and 00 < 0) is the probability the good becomes useable for production next period, and x;t is a smooth scaling factor which ensures balanced growth. The owners of an intermediate good that has not been adopted yet, incur in the adoption costs until they succedd in making the good useable for production. At this point, they obtain a capital gain because the value of the intermediate good becomes Vx;t+1 which is greater than Jx;t+1: In recessions, the future value of adopted intermediate goods is lower, and so is the value of unadopted intermediate goods. Next, I describe the laws of motion for the total number of intermediate goods in sector x; Zx;t; and for the number of adopted intermediate goods, Ax;t: The law of motion for the total number of intermediate goods is given by

7 Zx;t+1 Sx;t = x( ) + (4) Zx;t t where Sx;t is the amount of output spend in R&D activities in sector x; and where x and

t are scaling factors: Similarly, the law of motion for the number of adopted intermediate goods in sector x, Ax;t; is:

Ax;t+1 Zx;t = (x;tHx;t)[ 1] + (5) Ax;t Ax;t

Intuitively, Zx;t Ax;t is the stock of unadopted intermediate goods in sector x: A fraction t of those will be adopted at time t: Given Vx;t and Jx;t and the laws of motion for Ax;t and Zx;t; the following two equations determine the amount of resources invested in R&D, Sx;t, and adoption , Hx;t:

1 (R ) EtJx;t+1(Zx;t+1 Zx;t) = Sx;t (6) t+1 1 x;t0 R [Vx;t+1 Jx;t+1] = 1 (7) t+1 Equation (6) is a free entry condition that states that the discounted value of new intermediate goods created by undertaking R&D activities must equal the total cost. Equation (7) determines the optimal investment in adoption which is the level at which the marginal cost of investing output in adoption (RHS) equalizes the expected marginal bene…t (LHS) which is given by the marginal increase in the probability of successfully adopting the intermediate good times the capital gain from being adopted (i.e. Vx;t+1 Jx;t+1). These two equations illustrate why both R&D and adoption investments are por- cyclical. When the economy is hit by a positive wage markup shock causing a recession, the value of not adopted intermediate goods declines. Equation (6) implies that this will lead to a lower ‡ow of R&D investments. The value of adopted intermediate goods declines even more than the value of unadopted interemdiate goods, since the former is a¤ected immediately by the current decline in pro…ts while the latter is a¤ected only in the future when the technology is adopted. This decline in Vx;t+1 Jx;t+1 reduces the marginal bene…t from investing in adoption, and from (7) the ‡ow of output devoted to adopt new technologies:

8 These temporary declines in the investments in improving the existing technology through R&D and adoption have temporary e¤ect on the growth rate of technology, measured by Zx;t and Ax;t; as illustrated by (4) and (5). As a result, the e¤ects on the level of technology are permanent. This is the key to understanding the propagation power of the model. I conclude this section by linking the growth rate of new technologies with TFP growth. v It is possible to express the value added in sector x, Yx;t; as:

v 1 Yx;t = x;tKx;tLx;t (8) where x;t is the Solow residual in sector x; and Kx;t and Lx;t denote respectively its capital and labor. In equilibrium, x;t is given by

# 1 1 (Ax;t) x;t 1 x;t = (1 )Nx;t ( ) Ut : (9) x;t# x;t

There are a few new variables in this expression. x;t is the gross price markup, Nx;t is the number of …nal output producers in sector x; and Ut is the utilization rate. The capital utilization rate, Ut; enters x;t because it re‡ects unmeasured intensity of input 1 x;t usage. The term Nx;t re‡ects gains from variety due to short run ‡uctuations in the number of …nal output producers due to entry and exit. The markup x;t also enters x;t 1 x;t due to the roundabout input-output nature of production. On balance, Ut, Nx;t , and

x;t contribute to procyclical variation in x;t, particularly at the high frequencies.

Observe that x;t also increases with Ax;t (since # > 1). We should expect the in‡uence of Ax;t on x;t to play out mainly over the medium and low frequencies, since Ax;t is a state variable that moves smoothly in response to cyclical variations in endogenous investments in R&D and technology adoption processes.

4. Model Simulations

In this section I explore the ability of the model to generates medium term cycles. I solve the model by loglinearizing around the deterministic balanced growth path and then employing the Anderson-Moore code, which provides numerical solutions for general

9 …rst order systems of di¤erence equations. I use the same calibrated values for the model parameters as in Comin and Gertler (2006). When calibrating those parameters we make extensive use of the steady state relationships of the growth model. By using the same values for Japan and the US, I am implicitly assuming that along the balanced growth path the variables in both countries grow at the same rate. That seems a reasonable assumption. It is however di¢ cult to prove given the Japanese experience over the last 50 years. Between 1950 and 1985, Japan dramatically reduced its productivity gap with the US and quickly converged to approximately 80% of the US per capita income level. Since 1990, however, Japan has grown much slower than the US and the gap between the two has increased. Neither of these seem to corresponds to the balanced growth path of Japan, but rather to persistent transitional dynamics which a model like ours should attempt to explain. Hence, as a …rst pass, I …nd reasonable the strategy of assuming similar parameters in the US and Japan and see how far such a model can go in explaining the Japanese ‡uctuations.

4.1. Some Numerical Experiments

To be clear, the exercises that follow are meant simply as a …rst pass at exploring whether the mechanisms I emphasize have potential for explaining the data: They are not formal statistical tests. As in Comin and Gertler (2006), I treat innovations to the wage markup, w t , stemming from exogenous ‡uctuations in household labor market power as the main source of disturbances to the economy. As discussed above, one should keep in mind, though, that this simple mechanism is meant as a short-cut for a richer description of countercyclical wage markup behavior.3 Ideally, we would like to evaluate the model against moments of the data that are w conditional on a shock to t . There are several di¢ culties with this approach, however. First, while identi…ed VAR methods may be useful for measuring the near term e¤ects of shocks to the economy, they usually are very imprecise at measuring the kind of medium term e¤ects that are the focus of our analysis.4 Second, identi…cation of orthogonalized

3 As discussed in GGLS (2007), a model with either nominal or real wage rigidities can generate a countercyclical wage markup. 4 In particular, long run e¤ects of impulse response functions from indenti…ed VARs are measured much less precisely than are short run e¤ects.

10 w movements in t is highly problematic, particularly given that in practice there is likely a strong endogenous component to this variable. Rather than attempt to match imprecisely estimated conditional moments, we instead follow the lead of the traditional real business cycle literature by exploring how well a single shock presumed to be the principle driving force can explain the unconditional patterns in the data. We view this kind of exercise as a check on the plausibility of the scenario we o¤er, as opposed to a clear test against alternatives. While the RBC literature focused on the ability of technology shocks to account for the high frequency variation in w the data, we instead consider the ability of our model driven by shocks to t to explain the evolution of the Japanese macro variables after removing a linear trend. As a result, I will try to match not only the high frequency ‡uctuations in the Japanese data but also medium term ‡uctuations. Impulse response functions Before confronting the data, we …rst gain some intuition for the workings of the model w by examining the model impulse responses to a shock to t : In Figure 11, the solid line in each panel is the response of the respective variable within our model. For comparison purposes, I also include the responses (dotted lines) generated by a model that is very similar to the Neoclassical model since it does not have endogenous productivity or endogenous markup variation (though I allow for endogenous factor utilization). The period length is a year. w The rise in t e¤ectively raises the price of labor, reducing labor demand and output. Both the initial impact and the impact over time on output is larger in our full blown model than in the benchmark model. Within the full blown model, the decline in output leads to a rise in both the consumption and capital goods price markups (due to a decline in entry within each sector), enhancing the initial drop in output. Over time, output climbs back to trend, but does not make it back all the way due to the endogenous permanent decline in productivity, that we describe shortly. After a decade or so it levels o¤ at a new steady state. The permanent decline in output is about one half of the initial decline. In the benchmark model without endogenous productivity, output simply reverts back to its initial steady state. w Even though the shock is not technological, the rise in t generates a persistent decline in TFP and labor productivity and a persistent increase in the relative price of capital.

11 The initial decline in measured TFP and labor productivity results mainly from variable factor utilization (in conjunction with overhead costs) and the rise in the price markups.5 Over time, there is a decline in true productivity relative trend. In particular, the initial contraction in economic activity induces a drop in both R&D and the rate of technology adoption.6. The initial decline in R&D slows the rate of creation of new intermediate products in both the goods and capital sectors, ultimately leading to a permanent drop relative to trend in total factor productivity and labor productivity. The slowdown in the adoption rate leads to a near term decline in disembodied productivity growth. Absent this endogenous slowdown in technology adoption, the decline in productivity following the drop in R&D would take much longer, assuming realistic di¤usion lags. Similarly, variable price markup behavior accounts for the initial rise in the relative price of capital, while the increase over time is due to a decline in productivity in the capital goods sector relative to the consumption goods sector. Because investment ini- tially falls proportionately more than output, the capital goods markup rises relative to the consumption goods markup, leading to a jump in the relative price of capital. The disproportionate drop in investment also implies that expected pro…ts in the capital goods sector fall relative to the consumption goods sector. As a consequence, there is a relatively greater drop in both R&D and technology adoption in the capital goods sector, leading to a slowdown in the creation and adoption of specialized intermediate goods, relative the consumption goods sector. This leads to a permanent increase in the relative price of capital. The (simulated) Japanese slowdown The …nal step in the evaluation of the potential for the model to account for the Japanese Slowdown is to simulate the time series once the model economy is hit by

( 1) 5 YtAk;t The formal de…nition of TFP that we adopt is the following: TFPt = 1 ; where is the Kt Lt fraction of the variety externality in the creation of new capital not captured by the linear aggregation methodology used by the BEA to compute the capital stock: We calibrate to 0.31 to match the long run growth rate of TFP implied by the model to the postwar data. In case the variety externality was completely mismeasured, annual TFP growth would be 1.72% instead of the actual 1.12%. In addition, this de…nition assumes that the BLS measures of TFP do not correct properly for capacity utilization. 6 I am assuming that that R&D involves the same factor intensities as goods production. It is thus not as sensitive to wage behavior as in the Schumpeterian models of Aghion and Howitt (1992) and Aghion and Saint-Paul (1991). Barlevy (2003) shows that if productivity shocks in the …nal goods sector are su¢ ciently persistent, R&D can be procyclical even in a Schumpeterian model.

12 the wage markup shocks observed in the data. As mentioned in Section 2, the markup increased in japan starting approximately in 1990. It reached a maximum around 1994 and started to decline in 1996. (See Figure 10.) Figure 12 plots the evolution of GDP implied by the model and compares it to the actual evolution of GDP in Japan.7 To a …rst order, the model seems to predict an evolution for GDP over the 90s that tracks quite closely the data. In particular, it predicts that between 1990 and 1995 GDP declines by 11% relative to trend while in the data it declines by approximately 9.5 %, Then it recovers slightly for the next couple of years very much like the data. The biggest discrepancy between model and data seem to occur after 1998, where the model predict a mild recovery of GDP by 2% while in the data it decline by 2.5%. Overall, however, the two series are quite close and the ‡uctuations in GDP induced by the model are both very persistent and large. Figure 13 reproduces the model predictions and actual data for TFP relative to a linear trend.8 As with output, the model predictions follow reasonably closely the actual TFP series for Japan during the 1990s. One could argue that the …t of the TFP series in Figure 13 is not surprising in the light of the …nding in Hayashi and Prescott (2002) (and the RBC literature) that once we shock the economy with the observed TFP series, standard models are able to reproduce output ‡uctuations. However, the important di¤erence is that in our model TFP is completely endogenous, and, as shown in Figure 11, the persistence of the macro variables (including output and TFP) is much larger than the persistence of the shocks. As emphasized above, this endogenous propagation of the model is driven by the endogenous technology mechanisms. One of these is the development of new technologies through R&D. Figure 14 compares the evolution of R&D in the model and in the data. Qualitatively the model follows the data fairly closely. In both detrended (real) R&D expenditures decline from 1990 until 1995 and then they rebound. It is remarkable then that the model does not predict more persistent R&D expenditures than what we observe in the data. However, a feature of the model already pointed out in Comin and Gertler

7 Both of these series have been detrended using a linear trend of 2.4 % per year. In the data GDP has been also divided by the number of people with ages between 20 and 69 years to control for very low frequency ‡uctuations driven by demographic factors. 8 To be consistent with the calibration, we detrend TFP to the post-war average in the US of 1.12% per year, as measured by the BLS.

13 (2006) is that it generates R&D expenditures that are approximately twice as volatile as in the data. As a result, R&D declines more during the 90s in the model than it actually declined in the data. Next we turn to hours worked. Figure 15 displays the evolution of actual and predicted hours worked per person between 20 and 69 years old. The model does a fair job in reproducing the initial decline in hours worked. In the data, the minimum is reached around 1994 where hours worked is down 4.5%. The model predicts also a minimum around the same time but the decline is a bit less than 7%. Over the next three years, hours worked increase in both model and data. In the last two or three years is where model and data di¤er the most. In the model hours worked increases by 2.5% relative to the level in 1998 while in the data it declines until reaching a level 6% lower than in steady state. Figure 16 and 17 display the evolution of consumption and investment per working age population. For both of these variables, the model tracks quite closely the data with the caveat that the model does not fully capture the declines in these variables over the last couple of years of the decade. In any case, I think it is fair to say that the model does a surprisingly good job in explaining the Japanese slowdown during the 90s specially given that I have calibrated it using the US parameter values and that there are a number of factors completely missing from the analysis which must play a role. I proceed to discuss them in the concluding section.

5. Conclusions

Why was the 90s a lost decade for Japan? This paper has argued that though the shocks that hit the Japanese economy were not so persistent, the investments that Japanese companies and entrepreneurs did not undertake to improve the technology and the production methods during this decade propagated those shocks and made their e¤ects very long-lasting. Of course, these propagation mechanisms are not unique to Japan. Indeed, as shown by Comin and Gertler (2006), these same mechanisms do a very good job in accounting for the macro ‡uctuations in the US over the postwar period. There are several important questions that I have not addressed and which merit further research. First, and surely most important, what is the exact nature of the

14 markup shocks that hit the Japanese economy during the early 90s? Hayashi and Prescott (2002) identify one important shock in 1987 that introduced rigidities in the Japanese labor market, the reduction of the maximum number of working hours allowed per person. However, more work is needed to explore whether there were other distortionary government interventions in labor markets afterwards. As argued in Hall (1997) and GGLS (2007), among others, there are many shocks that are isomorphic to our wage markup shocks. Frictions in the labor markets, labor income taxes, shocks to the entry costs, changes in competition policies, even monetary policy in the presence of nominal rigidities all those can be expressed in a way whose reduced form collapses to our wage markup shocks. Further, …nancial frictions are isomorphic to shocks to the relative price of capital which, as shown by Comin, Gertler and Santacreu (2008) in a framework similar to the one used in this paper, have similar e¤ects in macro variables to our wage markup shocks once endogenous technology adoption is introduced in the model. To some extent, it is surprising how well the model …ts the Japanses experience over the 90s given how many mechanisms, which a priori seem relevant, I have left out of the model. It would be easy to argue that this list should contain, a least, credit market imperfections and the international economy. Credit imperfections may amplify business cycles through balance sheet e¤ects which make harder for …rms to borrow in recessions. It is not so clear, though, how they can propagate shocks. Further even their ampli…cation e¤ect might be questioned in the light of the …ndings in Hayashi and Prescott (2002). Exchange rate ‡uctuations, instead, may easily propagate certain shocks since the decline in aggregate demand in Japan led to an apreciation of the Yen that further reduced the demand for Japanese exports. I plan on exploring in future work, how these mechanisms interact with the mechanisms presented in this paper.

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[9] Gali, J., M. Gertler and D. Lopez-Salido (2007), “Markups, Gaps, and the Wel- fare Cost of Economic Fluctuations”, Review of Economics and Statistics, vol. 89 (February), pp. 44-59.

[10] Hall, R. (1997) “Macroeconomic Fluctuations and the Allocation of Time,”Journal of Labor Economics, S223-S250.

16 [11] Hayashi, F. and E. Prescott (2002), “Japan in the 90s: A Lost Decade," Review of Economic Dynamics.

[12] Romer, P. (1990), “Endogenous Technological Change” The Journal of Political Economy, Vol. 98, No. 5, Part 2. S71-S102.

[13] Rotemberg, J. and M. Woodford (1995), “Dynamic General Equilibrium Models with Imperfectly Competitive Product Markets.”In Frontiers of Business Cycle Analysis, T. Cooley and E. Prescott, editors, Princeton University Press.

17 Figure 1: Detrended Real GNP per working age population

110

100

40 Figure 2: Detrended TFP

120

110

100

60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 0 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2

Japan US Figure 3: TFP of services and non-services

115

110

105

100

70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1

Non-services Services Figure 4: TFP in selected manufacturing sectors

120

110

100

General Machinery Other Electrical Machinery Motor Vehicles Figure 5: Real expenses in R&D detrended at 2.4 percent per year

140

120

100

All Durable Manufacturing Manufacturing Figure 6: Real R&D Expenditures detrended at 2.4 percent per year

120

100

General machinery equipment Other electrical machinery Motor vehicles Figure 7: Real Wage rates 120

110

100

50 1970 1975 1980 1985 1990 1995 1998

All research General machinery equipment Other electrical machinery Motor vehicles Figure 8: Computers per capita

0.7

0.6

0.5

0.4

0.3

0.2

0.1

0 1980 1983 1986 1989 1992 1995 1998 2001 US Japan Korea Figure 9: Internet Users per capita

0.7

0.6

0.5

0.4

0.3

0.2

0.1

0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Japan South Korea USA Figure 10: Total Markup in Japan (band-pass filtered 2-100 quarters)

0.12

0.1

0.08

0.06

0.04

0.02

-0.02

-0.04

-0060.06

-0.08

-0.1 Y L 0 0.2 0 −0.2 0 −0.2 −0.4 −0.2 −0.4 −0.6 −0.4 −0.6 −0.8 −0.8 −0.6 −1 −1 −0.8 0 10 20 0 10 20 0 10 20

TFP PK Y/L 0.2 0.6 0.2

0 0 0.4 −0.2 −0.2 −0.4 0.2 −0.4 −0.6 −0.6 0 −0.8 0 10 20 0 10 20 0 10 20

S λ U 0 0 0.5

−1 −0.5 0 −2 −1 −0.5 −3 −1.5

−4 −2 −1 0 10 20 0 10 20 0 10 20

µw 1 0.8 0.6 0.4 0.2 0 0 10 20 Figure 12: Output per Working Age population (1990 = 100) 102 Model Data 100

84 1986 1988 1990 1992 1994 1996 1998 2000 Figure 13: Total Factor Productivity (1990 = 100) 101

Model 100 Data

92 1986 1988 1990 1992 1994 1996 1998 2000 Figure 14: R&D (1990 = 100) 105

Model Data 100

70 1986 1988 1990 1992 1994 1996 1998 2000 Figure 15: Hours Worked(1990 = 100) 101

Model 100 Data

93 1986 1988 1990 1992 1994 1996 1998 2000 Figure 16: Consumption (1990 = 100) 100

Model 99 Data

90 1986 1988 1990 1992 1994 1996 1998 2000 Figure 17: Investment (1990 = 100) 100

Model Data 95

65 1986 1988 1990 1992 1994 1996 1998 2000 CENTER ON JAPANESE ECONOMY AND BUSINESS Working and Occasional Papers

(Papers can be downloaded free of charge at: www.gsb.columbia.edu/cjeb/research/ac) Last update: March 18, 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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