Japan Project Meeting

June 30 - July 1, 2009
Jenny Corbett, Charles Horioka, Takatoshi Ito, Anil Kashyap, and David Weinstein, Organizers

Rasmus Fatum, University of Alberta
Official Japanese Intervention in the JPY/USD Exchange Rate Market: Is it Effective and Through Which Channel Does it Work?

Fatum investigates whether official Japanese intervention in the JPY/USD exchange rate between January 1, 1999 and March 31, 2004 was effective. By integrating official intervention data with a comprehensive set of newswire reports capturing days on which there is a rumor or speculation of intervention, he also attempts to shed some light on which channel, the signaling or portfolio balance channel, leads to effective Japanese intervention. The results suggest that Japanese intervention is effective during the first five years of the sample period and ineffective during the last three months of the sample period. That provides an ex-post rationale for why Japan intervened, as well as for why the interventions stopped. Moreover, the results suggest that when Japanese intervention is effective, it works through the portfolio-balance channel. The results regarding whether effective intervention also works through signaling are inconclusive

Ashish Arora, Duke University and NBER; Lee G. Branstetter, Carnegie Mellon University and NBER; and Matej Drev, Carnegie Mellon University
The Great Realignment: How the Changing Technology of Technological Change in Information Technology Affected the U.S. and Japanese IT Industries, 1983-1999

Arora, Branstetter, and Drev show that innovation in Information Technology (IT) increasingly has become dependent on and intertwined with innovation in software. This change in the nature of IT innovation has had differential effects on the performance of the United States and Japan, two of the largest producers of IT globally. The authors document this linkage between software’s contribution in IT innovation and the differential innovation performance of U.S. and Japanese electronics, semiconductors, and hardware firms. They collect patent data from USPTO in the period 1980-2002 and use a citation function approach to formally show the trend of increasing software dependence of IT innovation. Then, using a broad unbalanced panel of the largest U.S. and Japanese publicly listed IT firms in the period 1983-99, they show that 1) Japanese IT innovation relies less on software advances than U.S. IT innovation; 2) the innovation performance of Japanese IT firms increasingly is lagging behind that of their U.S. counterparts, particularly on IT sectors that are more software intensive, and 3) that U.S. IT firms increasingly are outperforming their Japanese counterparts, particularly in more software intensive sectors. The findings of this paper could provide a fresh explanation for the relative decline of the Japanese IT industry in the 1990s.

Tokuo Iwaisako, Ministry of Finance; and Keiko Okada, Hosei University
Understanding the Decline in the Japanese Saving Rate in the New Millennium

Iwaisako and Okada investigate why the Japanese household saving rate, which fell from the late 1990s to the first few years of the new millennium, suddenly stabilized after 2003. Analyzing income and spending data for different age groups, they argue that this is explained by Japanese corporate restructuring, prompted by the 1997 financial crisis and the resulting labor income decrease being concentrated among older working households. They believe two important changes in income distribution are associated with this mechanism. First, the negative labor income shock, which was mostly borne by the younger generation in the initial stages of the “lost decade” finally spread to older working households in the late 1990s and early 2000s. Second, there was a significant income shift from labor to shareholders, associated with the corporate restructuring during this time. This resulted in a decline in the wage share, so that the increase in corporate saving offset the decline in household saving.

Gil Bae, Korea University;Yasushi Hamao, University of Southern California; and Jun-Koo Kang, Nanyang Technological University
Bank Monitoring Incentives and Borrower Earnings Management: Evidence from the Japanese Banking Crisis of 1993-2002

Bae, Hamao, and Kang examine banks' disincentives to monitor borrowers' earnings management activity during the Japanese banking crisis of 1993-2002. The authors show that during this period, which was characterized by significant deterioration in the financial health of the Japanese banking sector, firms that borrowed a large amount of short-term loans from their main bank managed their earnings more aggressively around public equity offerings. This result derives largely from the subsample of offerings by poorly performing firms that maintained lending relationships with main banks that were in weak financial health. The authors also find a significant decrease in post-offering short-term lending by the main banks among firms that managed earnings upward prior to the offerings. In contrast, no such results exist for the boom period of 1983-92. These results suggest that, when they are under great pressure for survival, Japanese main banks have few incentives to monitor corporate managers, and act primarily in the interests of short-term creditors.

Sergey Chernenko,Harvard University and NBER;C. Fritz Foley, Harvard University and NBER; and Robin Greenwood, Harvard University and NBER
Are Agency Costs Fully Priced? Evidence from Public Listings of Subsidiaries in Japan

Chernenko, Foley, and Greenwood study the stock market performance of 431 subsidiaries listed in Japan during the 1980-2005 period. By retaining controlling stakes after listing, parent firms are able to divert resources to their own benefit. The authors find that minority shareholders in subsidiaries do not anticipate the full extent of such diversion and tend to overpay for subsidiary equity at the time of listing. This effect is particularly pronounced among subsidiaries for which resource diversion can be expected ex ante, such as subsidiaries that have a sales relationship with the parent company. Such subsidiaries earn monthly risk-adjusted returns of -71 basis points in the two-years after listing. A quarter of listed subsidiaries are eventually repurchased by their parents, after generating median buy and hold returns of -41.5 percent. These findings motivate the mispricing of agency costs as an alternative explanation for the formation of ownership structures that are prone to agency problems.

Jennifer Corbett, Australian National University; Fukunari Kimura, Keio University; and Kazunobu Hayakawa, Dr, IDE
Who's Serving You?

Corbett, Kimura, and Hayakawa The paper applies a gravity model to services trade and compares the results with a gravity analysis of disaggregated goods trade. They argue that services trade is more akin to trade in differentiated products than to total trade, and they compare the significance of the determinants in services with those in the trade of goods which are dominated by intra-industry trade. This paper extends the existing literature (a small number of papers use gravity models for services trade) by using more recent OECD bilateral services trade than has been previously available and by the more careful comparison with appropriate goods trade. It sheds new light on whether the gravity equation explains services trade as well as it explains goods trade; which factors are most important in services (particularly whether distance has a different impact in services trade from goods trade); and what are the appropriate econometric methods for establishing the benchmark models in both goods and services. The paper also examines whether Japan's trade in services is below average. Preliminary findings suggest that Japan's imports are average but exports are below average. This is an interesting result in the context of the low productivity and high regulatory barriers observed in Japan's service sector. Further research would examine the explanations for the Japanese pattern and would consider better methods for including barriers to services trade in the estimation.

Chihnan Chen; Tsutomu Watanabe, Hitotsubashi University; and Tomoyoshi Yabu
A New Method for Identifying the Effects of Foreign Exchange Interventions

The monetary authorities react even to intraday changes in the exchange rate; however, in most cases, intervention data is available only at a daily frequency. This temporal aggregation makes it difficult to identify the effects of interventions on the exchange rate. Chen, Watanabe, and Tomoyoshi propose a new method based on Markov Chain Monte Carlo simulations to cope with this endogeneity problem: they use "data augmentation" to obtain intraday intervention amounts and then estimate the efficacy of interventions using the augmented data. Applying this method to Japanese data, they find that an intervention of one trillion yen moves the yen/dollar rate by 1.7 percent, which is more than twice as large as the magnitude reported in previous studies applying OLS to daily observations. This shows the quantitative importance of the endogeneity problem attributable to temporal aggregation.

Takeo Hoshi, UC, San Diego and NBER; Satoshi Koibuchi, Chiba University of Commerce; and Ulrike Schaede, UC, San Diego
Changes in Main Bank Rescues during the Lost Decade: An Analysis of Corporate Restructuring in Japan, 1981-2007

Hoshi, Koibuchi, and Schaede study the incidence and processes of corporate restructuring between 1981 and 2007 in Japan. They build a unique database from newspaper articles on major episodes of corporate restructuring and link it to financial data on listed firms. They then examine what types of companies were more likely to be restructured and how this changed over time, especially during the "lost decade." They find that larger firms, firms in distress, and firms with a high dependence on banks, in particular a main bank, are more likely to be restructured. During the "lost decade", however, the likelihood for a distressed firm to undergo restructuring declined, including for firms highly dependent on bank borrowing. Nor did high dependence on a main bank increase the probability of restructuring during the 1990s. In terms of measures adopted by firms undergoing restructuring, they find significant reductions in employment, fixed capital, and total debt, but during the "lost decade," adjustments in debt and capital became more tentative.

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