Japan Project Meets

June 24 and 25, 2011
Jennifer Corbett, Australia-Japan Research Centre; Charles Horioka, NBER and Osaka University; Anil K Kashyap, NBER and the Graduate School of Business, University of Chicago; Kazuo Ueda, University of Tokyo; and David Weinstein, NBER and Columbia University, Organizers

Robert Dekle, University of Southern California; Hyeok Jeong, GRIPS; and Nobuhiro Kiyotaki, Princeton University and NBER
Dynamics of Trade and Heterogeneity in General Equilibrium

Dekle, Jeong, and Kiyotaki develop a dynamic general equilibrium model that tries to reconcile the observation that aggregate movements of exports and imports are "disconnected" from real exchange rate movements, while firm-level exports co-move significantly with the real exchange rate. Firms are heterogeneous, facing recurrent aggregate and firm-specific productivity shock; they choose which goods to export; and they decide to enter and exit the business endogenously. The authors calibrate and estimate the model with both aggregate and firm-level data from Japan.

Gauti Eggertsson, Federal Reserve Bank of New York, and Paul R. Krugman, Princeton University and NBER
Debt, Deleveraging, and the Liquidity Trap

Eggertsson and Krugman present a simple New Keynesian-style model of debt-driven slumps – that is, situations in which an overhang of debt on the part of some agents, who are forced into rapid de-leveraging, is depressing aggregate demand. Making some agents debt-constrained is a surprisingly powerful assumption: Fisherian debt deflation, the possibility of a liquidity trap, the paradox of thrift, a Keynesian-type multiplier, and a rationale for expansionary fiscal policy all emerge naturally from the model. The authors argue that this approach sheds considerable light both on current economic difficulties and on historical episodes, including Japan's lost decade (now in its 18th year) and the Great Depression itself.

Ayako Kondo, Osaka University, and Hitoshi Shigeoka, Columbia University
Effects of Universal Health Insurance on Health Care Utilization and Health Outcomes: Evidence from Japan

Kondo and Shigeoka investigate the effects of a massive expansion in health insurance coverage on health care utilization and health outcomes by examining the introduction of universal health insurance in Japan in 1961. There are three major findings in their study: first, health care utilization increases more than would be expected from previous estimates of the elasticities of individual-level changes in health insurance status. Second, increases in the supply of health care services tend to be smaller than increases in the demand for these services. The size of the supply response differs across types of services: while the number of medical institutions is unchanged, there is suggestive evidence of increases in the numbers of beds and physicians. This slow supply-side response may constrain the ability of the health care system to meet increased demand resulting from expansions in coverage. Third, there is no strong evidence of reduced mortality rates for any age categories, but there is some reduction in tooth cavities among elementary and junior high school children.

Melvin Stephens Jr., University of Michigan and NBER, and Takashi Unayama, Kobe University

The Consumption Response to Seasonal Income: Evidence from Japanese Public Pension Benefits (NBER Working Paper No. 16342)

Japanese public pension benefits, which were distributed quarterly through February 1990 and every other month since then, induce substantial but predictable income fluctuations. The relative magnitude of the payments combined with the delay between payments yields a stronger test of the Life-Cycle/Permanent Income Hypothesis than in prior studies. Applying two identification strategies to monthly household panel data, Stephens and Unayama find that consumption significantly responds to quarterly benefit receipt. Additional analysis suggests that these findings cannot be explained by either liquidity constraints or precautionary savings motives.

Jess Diamond, University of California at San Diego
Employment Status Persistence in the Japanese Labor Market

The growth of Japan's dual labor market, consisting of a primary sector of stable regular employment and a secondary sector of unstable non-standard employment, has become a cause for concern for policymakers trying to balance low unemployment with job security. Diamond uses the Keio Household Panel Survey, an individual-level panel data set, to investigate the effects on future employment opportunities of workers in Japan's non-standard employment and regular employment sectors. He finds strong evidence of persistence within the dual labor market, suggesting that past employment experience has a significant impact on future labor market outcomes.

Takero Doi, Keio University; Takeo Hoshi, University of California at San Diego and NBER; and Tatsuyoshi Okimoto, Hitotsubashi University
Japanese Government Debt and Sustainability of Fiscal Policy

Doi, Hoshi, and Okimoto construct quarterly series of the revenues, expenditures, and debt outstanding for Japan from 1980 to 2009 in order to analyze the sustainability of Japan's fiscal policy. They consider two descriptions of the government sector: the general government sector that includes the social security funds, and the central/local governments that do not include the social security funds. The researchers pursue three alternative but complementary approaches to examining sustainability. First, they calculate the minimum tax rate needed to stabilize the debt-to-GDP ratio for a given path of future government expenditures. Using 2010 as the base year, they find that the general government revenue-to-GDP rate must be raised permanently to 40 to 47 percent (from the current 33 percent) to bring the debt-to-GDP ratio back down to its 2010 level by 2100. Second, they estimate how the primary surplus responds to debt outstanding. They allow the relationship to fluctuate between two "regimes" using a Markov-switching model. For both the general government and the central/local governments, the primary surplus-to-GDP ratio responds negatively to debt in one regime and does not respond in the other regime, which suggests that the process is explosive. Finally, they estimate a fiscal policy function and a monetary policy function with Markov switching, which Davig and Leeper (2007) have estimated for the United States. For both the general government sector and the central/local governments, fiscal policy is "active" in the sense that tax revenues do not tend to rise when debt increases. On the other hand, monetary policy is "passive" in the sense that the interest rate does not react to the inflation rate sufficiently, in both regimes. All of these results point to the same conclusion: the current fiscal situation for the Japanese government is not sustainable. It takes an unprecedented magnitude of fiscal consolidation and/or inflation to stabilize the debt.

Shinji Takagi, Osaka University
The Future Role of Japan in Asia

Takeo Hoshi and Anil Kashyap
Why Did Japan Stop Growing?

The Japanese economy has been stagnating for almost two decades. Hoshi and Kashyap attempt to explain the causes of this stagnation and to identify policy choices that might help restore growth. Their focus is on longer-term issues, rather than the immediate challenges that are associated with the fallout from the global recession. They begin by using the neoclassical growth model to describe the post-war Japanese economy. The model conveniently describes the growth experience and shows how growth has changed over time. Prior to the 1970s, the Japanese economy enjoyed a very rapid pace of economic growth. But, during the 1970s important factors that supported this rapid growth started to disappear. First, Japan was catching up with more advanced economies, such as the United States. Thus, Japan could no longer grow simply by imitating or importing new technologies from the advanced economies. The practices and economic institutions that worked well during the catchup phase were not so well-suited to a more mature economy. Second, financial globalization and the collapse of the fixed exchange rate regime meant that by the end of the 1970s Japan could not rely on an undervalued currency to boost its exports. Japan had to rearrange its production system and other economic institutions to cope with globalization and to reduce its reliance on external demand. Third, Japan's population structure was shifting and becoming increasingly elderly. This aging meant slower growth of the labor force. The aging and the declining fertility eventually also reduced the domestic saving that supported economic expansion during the rapid economic growth period.

Hiroyuki Kasahara, University of British Columbia, and Yasuyuki Sawada and Michio Suzuki, University of Tokyo
Investment and Borrowing Constraints: Evidence from Japanese Firms

Kasahara, Sawada, and Suzuki quantitatively examine the effect of government capital injections into financially troubled banks on the level of corporate investment during the Japanese financial crisis. They develop a dynamic structural model of firm investment which incorporates endogenous borrowing constraints, where the real interest rates endogenously depend on firm's state variables including productivity, collateral, debt, and the BIS capital adequacy ratio of its main bank. In the model, lowering the main bank's capital adequacy ratio leads to a tighter borrowing constraint and lower firm investment. Combining corporate finance data from the Development Bank of Japan with the Nikkei NEEDS's bank balance sheet data, the authors estimate the structural model and conduct counter-factual policy experiments to quantitatively assess the effect on investment of capital injections that took place in March 1998 and 1999 in Japan. The results of the counterfactual experiments indicate that the total amount of aggregate investment in 1998 would have been lower by 1.84 percent if there had been no capital injection in 1998, while it would have been higher by 8.32 percent if the 1999 capital injection (8.6 trillion yen) had taken place in 1998 on top of the 1998 capital injection (1.8 trillion yen).

Kohei Kubota and Fumio Ohtake, Osaka University; Charles Y. Horioka, Osaka University and NBER; Akiko Kamesaka, Aoyama Gakuin University; and Masao Ogaki, Keio University
Cultures, Worldviews, and Intergenerational Altruism

Kubota, Horioka, Kamesaka, Ogaki, and Ohtake present empirical evidence concerning the effects of cultural differences on parents' attitudes toward children, using unique U.S. and Japanese survey data. These data sets were collected by Osaka University, and they incluude questions concerning worldviews and religions, hypothetical questions about parental behavior, and questions about socioeconomic variables. The data show that U.S. parents tend to be tougher toward young children than Japanese parents . The evidence here further suggests that the worldviews held by parents affect their attitudes toward their children. People who are confident about issues related to their worldviews tend to show tough attitudes toward their children. Because U.S. parents are much more confident about worldview issues on average than Japanese parents, this cultural difference helps to explain a substantial portion of the difference in parental attitudes between U.S. and Japanese parents.

Richard H. Steckel, Ohio State University and NBER, and Dongwoo Yoo, Ohio State University

Property Rights and Financial Development: The Legacy of Japanese Colonial Institutions (NBER Working Paper No. 16551)

Several studies link modern economic performance to institutions transplanted by European colonizers. Steckel and Yoo extend this line of research to Asia. Japan imposed its system of well-defined property rights in land on some of its Asian colonies, including Korea, Taiwan, and Palau. In 1939 Japan began to survey and register private land in its island colonies, an effort that was completed in Palau but interrupted elsewhere by World War II. Within Micronesia, robust economic development followed only in Palau, where individual property rights were well defined. The authors show that well-defined property rights in Korea and Taiwan secured land taxation and enabled farmers to obtain bank loans for capital improvements, principally irrigation systems. Their analytical model predicts that the high costs of creating an ownership updating system and a citizen-identity system discourage a short-sighted government from implementing these crucial components, the absence of which gradually makes land registration obsolete. Third, considering all of Japan's colonies, the researchers use the presence or absence of a land survey as an instrument to identify the causal impact of new institutions. Their estimates show that property-defining institutions were important for economic development, and these results are confirmed when using a similar approach with British Colonies in Asia.