Japan Project

The NBER held a meeting on the Japanese economy in Tokyo on July 30. The seminar was organized by Shiro Armstrong of the Australian National University, Research Associate Charles Horioka of the Asian Growth Research Institute (Kitakyu-shu), Research Associate Takeo Hoshi of Stanford University, Tsutomu Watanabe of the University of Tokyo, and Research Associate David Weinstein of Columbia University. These researchers' papers were presented and discussed:

Shuhei Kitamura, Osaka University

Land Ownership and Development: Evidence from Postwar Japan

Kitamura analyzes the effect of land ownership on technology adoption and structural transformation using Japanese land reform as a natural experiment. The reform redistributed a large area of farmlands from landlords to tenants, or cultivators of these farmlands, who became land owners during the reform. The redistribution policy increased the adoption of new laborsaving technologies in agriculture which became available after the reform, and that, because of the technology adoption, enabled the out-migration of young population from rural to urban areas when the urban sectors were growing. Kitamura also analyzes the aggregate impact of labor reallocation on economic growth by using a simple growth model and micro data and finds that it increased GDP by about 12 percent of the GDP in 1974 during 1955-74. Kitamura also finds a large and positive effect on agricultural productivity.

Sergi Basco, Universitat Autònoma Barcelona, and John P. Tang, Australian National University

The Samurai Bond: Credit Supply and Economic Growth in Pre-War Japan

While credit supply growth is associated with exacerbating financial crises, its impact on long-run development is unclear. Using bond payments to samurai in nineteenth century Japan as a quasi-natural experiment and exploiting regional variation, Basco and Tang find that bond payments are associated with persistent redistributive effects between regions and sectors. Areas with early railway access and higher bond value per capita experienced faster income growth in the tertiary sector and slower growth in the primary, with analogous effects for sectoral labor shares. The researchers' interpretation is that the interaction between credit supply and productivity-enhancing technologies facilitated economic development and structural transformation.

Cynthia Balloch, Columbia University

Inflows and Spillovers: Tracing the Impact of Bond Market Liberalization

As bond markets grow, this affects not only the financing decisions of firms, but also the lending behavior of banks, and the resulting equilibrium allocation of credit and capital. Balloch makes three contributions to understand the impact of bond market liberalization. First, using evidence from reforms in Japan that gave borrowers selective access to bond markets during the 1980s, it is shown that firms that obtained access to the bond market used bond issuance to pay back bank debt. More importantly, this led banks to increase lending to small and medium enterprises and real estate firms. Second, a model is proposed of financial frictions that is consistent with the empirical findings, and uses the model to derive general conditions under which bond liberalization has this effect on banks. The model predicts that bond liberalization can significantly worsen the quality of the pool of bank borrowers, and so lower bank profitability. These results suggest that Japan's bond market liberalization contributed to both the real estate bubble in the 1980s and bank problems in the 1990s. Third, the model implies that bond markets amplify the effects of shocks to the risk-free rate and firm borrowing, in addition to attenuating the effects of financial shocks.

Martín Uribe, Columbia University and NBER

The Neo-Fisher Effect in the United States and Japan (NBER Working Paper No. 23977)

What is the short-run effect on inflation and output of a permanent increase in the nominal interest rate? Uribe addresses this question by postulating a structural autoregressive model that allows for transitory and permanent nominal and real shocks. Uribe estimates the model on postwar U.S. and Japanese data and finds that nominal interest rate increases that are expected to be temporary, lead, in accordance with conventional wisdom, to a temporary increase in real rates that is contractionary and deflationary. By contrast, nominal interest-rate increases that are perceived to be permanent cause a temporary decline in real rates with inflation rising quickly to a higher permanent level. Estimated impulse responses show that inflation reaches its higher long-run level within a year. Importantly, because real rates are low during the transition, the economy does not suffer an output loss. This result is relevant for the design of monetary policy in economies plagued by chronic below-target inflation, for it is consistent with the prediction that a credible announcement of a gradual return of nominal rates to normal levels can bring about a swift convergence of inflation to its target level without negative consequences for aggregate activity. An important byproduct of the proposed empirical model is that distinguishing permanent and temporary nominal shocks eliminates the so-called price puzzle.

Yuhei Miyauchi, MIT

Matching and Agglomeration: Theory and Evidence from Japanese Firm-to-Firm Trade

Why are economic activities geographically concentrated? Miyauchi argues that increasing returns in firm-to-firm matching is an important source of agglomeration. Miyauchi opens by providing reduced-form evidence of increasing returns in matching using a panel of firm-to-firm trade data covering over a million Japanese firms. Using unexpected supplier bankruptcies as an instrument, it is shown that the new supplier matching rate upon a supplier loss increases in locations and industries when there are more alternative suppliers selling in the buyer's location, while this rate remains stable in the presence of other buyers looking for a match. Based on these findings, a new structural trade model is developed that incorporates dynamic firm-to-firm matching across space in a standard Melitz model. In this economy, the presence of more input sellers increases input buyers' aggregate sales by improving the supplier matching rates and hence reducing their production cost. This, in turn, attracts more suppliers to sell in the location. The model is calibrated to match the reduced-form estimates, and it is shown that this type of circular causation explains 7% and 16% of spatial inequality of the firm density and the real wages in Japan, respectively. Lastly, policies to promote economically lagged areas are analyzed, and it is found that (1) subsidies for input suppliers to sell in the target areas are much more effective in improving the welfare of these areas than subsidies to produce in these areas, and (2) a small improvement of transportation infrastructure may harm the periphery.

Toshiaki Iizuka, University of Tokyo, and Hitoshi Shigeoka, Simon Fraser University and NBER

Patient Cost-sharing and Health Care Utilization among Children

Understanding how a patient responds to the price of health care is key to the optimal design of health insurance. However, past studies are predominantly concentrated on adults and the elderly, and surprisingly little is known concerning children. Exploiting over 5,000 variations in subsidies at the municipality-age-time level in Japan, Iizuka and Shigeoka document a number of behavioral price responses among children. First, they find that free care for children significantly increases the outpatient spending by 22%-31%, with the price elasticities being considerably smaller than RAND Health Insurance Experiment for the nonelderly. Second, the researchers do not find asymmetric responses to the price changes of opposite directions. Third, they find substantially larger price responses when small copayments are introduced to free care, indicating that demand is more elastic around a zero price ("zero-price" effects). Finally, the researchers provide evidence suggesting that most increases in utilization reflect low-value or costly care. Increases in outpatient visits neither reduce hospitalization by "avoidable" conditions nor improve short- or medium-term health outcomes. Furthermore, inappropriate use of antibiotics and costly off-hour visits increase. Taken together, the results indicate that the benefit of such a generous subsidy is limited, at least in the short and medium term.

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