Japan Project Meeting

June 25-26, 2010
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; and David Weinstein, NBER and Columbia University, Organizers

Mary Amiti, Federal Reserve Bank of New York; and David Weinstein, Columbia University and NBER
Exports and Financial Schocks

A striking feature of many financial crises is the collapse of exports relative to output. In the 2008 financial crisis, real world exports plunged 17 percent while GDP fell 5 percent. Amiti and Weinstein examine whether the drying up of trade finance can help explain the large drops in exports relative to output. Their paper is the first to establish a causal link between the health of banks providing trade finance and growth in a firm's exports relative to its domestic sales. They overcome measurement and endogeneity issues by using a unique dataset, covering the Japanese financial crises of the 1990s, which enables them to match exporters with the main bank that provides them with trade finance. Their point estimates are economically and statistically significant, suggesting that trade finance accounts for about one-third of the decline in Japanese exports in the financial crises of the 1990s.

Kazuo Ogawa, Osaka University; Elmer Sterken, University of Groningen; and Ichiro Tokutsu, Kobe University
Financial Distress and Industry Structure: An Inter-Industry Approach to the 'Lost Decade' in Japan

Ogawa, Sterken, and Tokutsu propose a novel approach to investigating the propagation mechanism of balance sheet deterioration in financial institutions and firms, by extending the input-output analysis. First, they use input-output tables classified by firm size. Second, they link the input-output table with the balance sheet conditions of financial institutions and firms. Based on Japanese input-output tables, they find that the lending attitude of financial institutions affected firms' input decision in the late 1990s and the early 2000s. Simulation exercises are used to evaluate the effects of changes in the lending attitude toward small firms as favorable as toward large firms on sectoral allocations. The researchers find that output was increased for small firms and reduced for large firms. The change in output was modest, about 3.5 percent of the initial output of each sector, although it exceeded 10 percent in textile, iron and steel, non-ferrous metals, fabricated metal products, and transport equipment.

Yasushi Hamao, University of Southern California; Kenji Kutsuna, Kobe University; and Pedro Matos, University of Southern California
Foreign Investor Activism in Japan: The First Ten Years

Hamao, Kutsuna, and Matos provide a comprehensive look at the first decade of foreign investor activism in Japan, the second largest stock market in the world with many underperforming and cash-rich firms. Barriers to shareholder activism have historically been high, but they document an unprecedented wave of block acquisitions by hedge fund and other investors with a total of 916 stakes reported in the period between 1998 and 2009. There is, on average, a modest positive stock price reaction to the announcement of activist investments, particularly for events involving hostile funds. The long-run returns on activism are low overall, but positive for events involving hostile funds. The authors find that while activists have forced target firm managers to increase their payouts compared to peer firms, there is no evidence of major operational improvements or restructuring. Finally, after 2006 there was a widespread adoption of "poison pills" by firms, particularly those targeted by activists, and a subsequent drop in investor activism. This paper illustrates the limits to shareholder activism in a country where the takeover market is thin and cannot be used by the activist investor as an exit strategy.

Chad Steinberg, International Monetary Fund
Shakedown: Economic Geography Meets the Kobe Earthquake

Steinberg empirically investigates the claims of economic geography, which states that access to markets and access to suppliers creates benefits to firm -- location and, therefore, local markets are a source of relative advantage. Yet, while an abundance of evidence confirms the existence of a strong correlation between location parameters and production patterns, these empirical results often fail to account for the fundamental endogeneity of the explanatory regressors. Steinberg uses the exogenous variation generated by an earthquake in Kobe, Japan to solve this problem. Using a panel dataset of industrial production by regional center, he shows that economic geography is a source of relative advantage, but only in markets and across regions where trade costs are relatively high. Specifically, because the relative costs of trade in intermediates is larger than trade in final goods, firms benefit from proximity to one another, but do not gain from relative proximity to consumer. Because trade costs are relatively larger when goods travel across borders than when goods travel within borders, economic geography can explain international, but not intra-national patterns of production.

Takayuki Mizuno, Makoto Nirei, and Tsutomu Watanabe, Hitotsubashi University
Closely Competing Firms and Price Adjustment: Evidence from an Online Marketplace

Mizuno, Nirei, and Watanabe investigate retailers' price setting behavior using a unique dataset containing by-the-second records of prices offered by closely competing retailers on a major Japanese price comparison website. First, they find that when the average price of a product across retailers falls rapidly, the frequency of price adjustments increases, and the size of price adjustments becomes larger. Second, they find positive autocorrelation in the frequency of price adjustments, implying that there tends to be clustering where price adjustments occur in succession. In contrast, there is no such autocorrelation in the size of price adjustments. These two findings indicate that the behavior of competing retailers is characterized by state-dependent pricing rather than time-dependent pricing.

Yuki Hashimoto, University of Tokyo, and Ayako Kondo, Osaka University
Long-Term Effects of Labor Market Conditions on Family Formation for Japanese Youths

Hashimoto and Kondo aim to examine how each cohort's family formation is affected by labor market conditions experienced in youth in Japan. Although the deteriorated youth employment opportunities have been often blamed for the declining marriage and fertility rates, the effects of slack labor market conditions on marriage and fertility are theoretically unclear. The authors estimate the effects of regional labor market conditions on fertility and marriage formations, controlling for nation-wide year effects and prefecture fixed effects. They find that: the contemporaneous unemployment rate is not statistically significantly correlated with the fraction of ever married population or women with a child; high school educated women who experienced a recession at entry to the labor market are less likely to have a child and tend to marry later, although the effect for men in the same cohort is subtle; a recession might actually increase fertility for college educated women; and, the overall impact of labor market conditions experienced in youth on family formation is relatively weak given the well-documented persistent loss in earnings and employment stability.

Ayako Suzuki, Waseda University
An empirical analysis of entrant and incumbent bidding in electric power procurement auctions

Suzuki explores the asymmetry between entrants and incumbents in electric power procurement auctions in Japan. In this market, entrants are considered to have a significant disadvantage in production cost structure, while incumbents have high opportunity costs of winning auctions. Using transaction prices, he empirically analyzed the bidding patterns and the cost distributions of entrants and incumbents. He uses a structural model in which the participation of entrants in an auction is endogenous. He also conducts counterfactual analyses under a price-preference policy to see whether such a policy can enhance competition and the participation of entrants. The results indicate that the cost distribution of incumbents has a higher mean than that for entrants and that the opportunity cost of winning auctions for incumbents is economically significant. For the average auction, price-preferential treatment does not have much effect on entrant participation. Also, a preference for the weak bidder (namely, the incumbent) does not improve the government's procurement cost. In fact, government cost is minimized with a small preference for entrants, where the competition effect on the incumbent offsets the preference effect on entrants.

Kazuki Onji, Australian National University; David Vera, Kent State University; and Jennifer Corbett, Australian National University
Capital Injection, Restructuring Targets and Personnel Management: The Case of Japanese Regional Banks

A case study of the Japanese bank recapitalization by Hoshi and Kashyap (2005) identified a bank that overstated the progress of required personnel downsizing by shifting employees to subsidiaries. Onji, Vera, and Corbett ask if the recapitalization program had a systematic flaw in design. They focus on regional banks with a unique panel dataset of 82 banking groups that allows them to observe the employment levels of subsidiaries, in addition to those of parent banks, over fiscal 1994--2006. They estimate a labor-demand equation with sluggish adjustment to compare the employment patterns of public capital recipients and other banks. They find that four banks increased subsidiary employment after receiving capital injection, but only temporarily. This temporary effect suggests that the personnel shifting was essentially layoffs. This indicates that, despite the limited transparency of personnel sizes on the consolidated basis, rules on capital injection provided incentives for most recipients to pursue downsizing.

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