Japan Project

August 1, 2016
Shiro Armstrong of Crawford School of Public Policy; Charles Horioka of Asian Growth Research Institute; Takeo Hoshi of Stanford University; Tsutomu Watanabe of the University of Tokyo; and David Weinstein of Columbia University, Organizers

Robert Dekle, University of Southern California; Atsushi Kawakami, Teikyo University; Nobuhiro Kiyotaki, Princeton University and NBER; and Tsutomu Miyagawa, Gakushuin University

Product Dynamics and Aggregate Shocks: Evidence from Japanese Product and Firm Level Data

Conceptually linking product adding and dropping to business cycles goes back to at least Shumpeter. Dekle, Kawakami, Kiyotaki, and Miyagawa examine the effects of shocks to aggregate productivity, foreign demand, government expenditures, and demand for foreign liquidity on the dynamics of products of heterogeneous firms. The researchers' structural empirical specifications connecting macroeconomic shocks to product dynamics are based on a neoclassical dynamic general equilibrium model (Dekle, Kiyotaki, and Jeong, 2014). They first construct unique firm level data on products and exports from the Japanese Census of Manufactures. The data are more disaggregated than comparable U.S. data and available at the annual frequency (while U.S. product level data are only available at five-year intervals), which makes the authors' data more suitable for examining the interaction between the business cycle and firm-product dynamics. They find that positive macroeconomic shocks in total factor productivity, government demand, and real exchange rates strongly increase the number of products.

David Cashin, Federal Reserve Board, and Takashi Unayama, Hitotsubashi Universit

The Impact of a Permanent Income Shock on Consumption: Evidence from Japan's 2014 VAT Increase

Cashin and Unayama test the Life Cycle/Permanent Income Hypothesis (LCPIH) using Japan's 2014 Value-Added Tax (VAT) rate increase as a natural experiment. The VAT rate increase represents an unanticipated and proportional reduction in lifetime resources for several reasons: few goods and services are exempt from the VAT; the tax rate increase was uncompensated; it was fully passed on to households in the form of higher prices; and the VAT increase was not anticipated prior to Prime Minister Abe's October 2013 announcement. Contrary to the excess smoothness literature, the researchers find that consumption fell in proportion to the income shock upon announcement, implying that the LCPIH cannot be rejected.

Jess Diamond, Hitotsubashi University; Kota Watanabe, Meiji University; and Tsutomu Watanabe

The Formation of Consumer Inflation Expectations: Evidence from Japan's Deflation Experience

Using a new micro-level dataset, Diamond, Watanabe, and Watanabe investigate the relationship between the inflation experience and inflation expectations of individuals in Japan. The researchers focus on the period after 1995, when Japan began its era of deflation. The authors key findings are fourfold. Firstly, they find that inflation expectations tend to increase with age. Secondly, they find that measured inflation rates of items purchased also increase with age. However, they find that age and inflation expectations continue to have a positive correlation even after controlling for the individual-level rate of inflation. Further analysis suggests that the positive correlation between age and inflation expectations is driven to a significant degree by the correlation between cohort and inflation expectations, which the authors interpret to represent the effect of historical inflation experience on expectations of future inflation rates.

Gauti Eggertsson, Brown University and NBER; Neil Mehrotra and Sanjay Singh, Brown University; and Lawrence Summers, Harvard University and NBER

A Contagious Malady? Open Economy Dimensions of Secular Stagnation (NBER Working Paper No. 22299)

Conditions of secular stagnation - low interest rates, below target inflation, and sluggish output growth - characterize much of the global economy. Eggertsson, Mehrotra, Singh, and Summers consider an overlapping generations, open economy model of secular stagnation, and examine the effect of capital flows on the transmission of stagnation. In a world with a low natural rate of interest, greater capital integration transmits recessions across countries as opposed to lower interest rates. In a global secular stagnation, expansionary fiscal policy carries positive spillovers implying gains from coordination, and fiscal policy is self-financing. Expansionary monetary policy, by contrast, is beggar-thy-neighbor with output gains in one country coming at the expense of the other. Similarly, the researchers find that competitiveness policies including structural labor market reforms or neomercantilist trade policies are also beggar-thy-neighbor in a global secular stagnation.

Hiroshi Fujiki, Chuo University, and Hajime Tomura, Waseda University

Fiscal Cost to Exit Quantitative Easing: The Case of Japan

In this paper, Fujiki and Tomura simulate the cash flows and balance sheets of the Bank of Japan (BoJ) before and after the end of Quantitative and Qualitative Monetary Easing (QQE) under various scenarios. The simulations show that the BoJ will record significant accounting losses after the end of QQE, because the yields on Japanese government bonds (JGBs) acquired during QQE will be lower than the interest rate on excess reserves due to the normalization of the short-term interest rate after the end of QQE. These losses are fiscal costs for the consolidated Japanese government, as they correspond to increased interest expenses to the public. The extent of the BoJ's accounting losses depends crucially on the duration of QQE and the interest-rate elasticity of banknote demand.

Mark Koyama, George Mason University; Chiaki Moriguchi, Hitotsubashi University; and Tuan-Hwee Sng, National University of Singapore

Geopolitics and Asia's Little Divergence: State Building in China and Japan After 1850

Koyama, Moriguchi, and Sng provide a new framework to account for the diverging paths of political development and state building in China and Japan during the second half of the nineteenth century. The arrival of Western powers not only brought opportunities to adopt new technologies, but also fundamentally threatened the national sovereignty of both Qing China and Tokugawa Japan. The researchers argue that these threats and opportunities produce an unambiguous tendency toward centralization and modernization for small states, but place conflicting demands on geographically larger states. The researchers use their theory to study why China, which had been centralized for much of its history, experienced gradual disintegration upon the Western arrival, and how Japan, which was originally politically fragmented, rapidly unified and modernized during the same period. To further demonstrate the validity of their model, the authors apply it to two other historical episodes of state building: the unification of Anglo-Saxon England in the tenth century and the rise of Muscovy during the fifteenth century.