On the Role of Monetary Policy in a Deflationary Economy: The Case of Japan

In this paper we review the role of monetary policy for a country facing deflationary pressure based on the recent experience of the Japanese economy. We discuss economic background of inflation policy in Japan and analyze the impacts of the policy. We made simple calculations regarding how much the debt of selected companies and government can be reduced by mild inflation. Noting that the Fisher effect does not work perfectly under liquidity traps, the effect of inflation on debt issue appears quite large. To maintain controllable stable inflation, inflation targeting is a good candidate for the policy rule. J. Japan. Int. Econ., December 2000, 14(4), pp. 238–260. Graduate School of Economics, University of Tokyo, 7-3-1 Hongo, Bukyo-ku, Tokyo 113-0033, Japan Copyright 2000 Academic Press.Journal of Economic Literature Classification Numbers: E31, E52, E58.     

The Stability of the Japanese Banking System: A Historical Perspective

In this paper we study the stability of the Japanese banking system in the prewar period. First, we review the development of the Japanese banking system from the Meiji Restoration until the Second World War. It will be shown that government policy toward the banking industry changed drastically after the 1927 banking panic. Second, we examine the causes of bank closings in 1927. We test whether or not such bank closings were due to their unsound management, which was reflected in the structure of assets and liabilities and bank performance, using a qualitative model. Our empirical results conclude that bank closings occurred more for banks with unsound management and inefficient operations. J. Japan. Int. Econ., December 1993, 7(4), pp. 387–407. School of Political Science and Economics, Waseda University, 6-1 Nishiwaseda 1-chome, Shinjuku-ku, Tokyo 160, Japan; and University of Tokyo, Hongo, Bunkyo-ku, Tokyo, Japan.     

Demand for Bank Loans and Investment under Borrowing Constraints: A Panel Study of Japanese Firm Data

We estimate a corporate demand model for bank loans on the basis of panel data set of Japanese corporations. What is novel is an explicit treatment of borrowing constraints in the estimation, which is formulated as a function of the land asset of the firms. The model is estimated by employing the econometric technique used for analyzing the disequilibrium model. The virtue of our approach is to separate firms into constrained and unconstrained groups endogenously. We find that land plays a significant role as collateral in mitigating the borrowing constraints. We also compare the investment behavior between the constrained firms and the unconstrained firms. Cash flow as well as land plays a far more vital role in the investment decision for the borrowing-constrained firms. J. Japan. Int. Econ., March 2000, 14(1), pp. 1–21. Institute of Social and Economic Research, Osaka University, 6-1 Mihogaoka, Ibaraki 567-0047, Japan; Department of Commerce, Meiji University, 1-1 Kanda Surugadai, Chiyoda-ku, Tokyo 101-8301, Japan. Copyright 2000 Academic Press.Journal of Economic Literature Classification Numbers: G32.     

Monetary Policy, Credit, and Real Activity: Evidence from the Balance Sheet of Japanese Firms

We analyze the mechanism of monetary transmission in the Japanese economy by using the quarterly time series data disaggregated by firm size. In particular we examine the channels through which monetary policy influences the firm's fixed investment with special focus on the firm's land. We estimate the vector autoregressive model where we encompass two competing hypotheses on the monetary transmission: monetary and credit channels. Our evidence is in support of the credit channel. We find that land has played a vital role in the monetary transmission, especially for small firms. Moreover, we find that fall of land value in 1990s weakened the efficacy of monetary policy considerably. J. Japan. Int. Econ., December 2000, 14(4), pp. 385–407. Institute of Social and Economic Research, Osaka University, Osaka, Japan Copyright 2000 Academic Press.Journal of Economic Literature Classification Numbers: E22, E32, E44, E51.     

Why do commercial banks hold government bonds? The case of Japan

We investigate the determinants of the demand for Japanese government bonds (JGBs) by commercial banks in Japan. In particular, by estimating portfolio equations for JGB demand and bank loans, based on a panel data set from the late 1990s to the 2000s, we rigorously test the popular assertion that the long stagnation of the real economy caused a shift in the portfolios of commercial banks from bank lending to JGBs. We find that the popular assertion is not empirically supported. Rather, the portfolio shift from loans to JGBs has been caused by a fall in the ratio of the loan rate to unit lending costs, or the bank’s price–cost margin for lending.     

Deficit Spending in the Nazi Recovery, 1933–1938: A Critical Reassessment

This paper examines the effects of deficit spending and work-creation on the Nazi recovery, employing archival data on the public deficit and modern time series techniques. Although deficit spending was tried and full employment was reached within four years, the fiscal impulse generated by the deficits does not appear to have driven the speed of recovery. VAR forecasts of output using fiscal and monetary policy instruments suggest only a minor role for active policy during the recovery. Nazi policies deliberately crowded out private demand to ensure high rates of rearmament. Military spending dominated civilian work-creation already in 1934. Investment in autobahn construction was minimal during the recovery and gained momentum only in 1936 when full employment was approaching. Continued fiscal and monetary expansion after that date may have prevented the economy from sliding back into recession. We find some effects of the Four Years Plan of late 1936, which boosted government deficits further and tightened public control over the economy. J. Japan. Int. Econ., December 2002, 16(4), pp. 559–582. School of Business and Economics, Humboldt University of Berlin, Spandauer Strasse 1, D-10178 Berlin, Germany; and CEPR. © 2002 Elsevier Science (USA).Journal of Economic Literature Classification Numbers: N44, N14, E52, E47, E65, E27.     

Loan interest rate pass-through and changes after the financial crisis: Japan’s evidence

We estimate interest rate pass-through in the loan market using an individual bank-based panel dataset from Japan. Previous studies using data from European countries have presented a number of common findings, including that banks with a high proportion of relationship lending tend to set lower pass-through. In this respect, we have obtained similar results using a dataset for Japan going back to the early 2000s. We further examine the influence of borrowing firms’ balance sheet characteristics on loan interest rate pass-through, and find that these additional factors are also important determinants for pass-through dispersion. However, after the recent global financial crisis, even banks with a high proportion of relationship lending have largely lowered loan interest rates by raising pass-through, and pass-through has not necessarily been determined in accordance with borrowing firms’ balance sheet characteristics. These results differ from those of recent studies on European countries. Possible background factors explaining this change are that (i) pressure to lower loan interest rates has risen due to extensive monetary easing and greater lending competition among banks, while Japan’s banking system as a whole has maintained its resilience in the post-crisis period; (ii) demand for bank loans has increased substantially due to disruptions in the market for alternative funding sources, such as commercial paper and corporate bonds; and (iii) public measures to increase bank loans have been broadly introduced in Japan.     

Is Japan's trade (still) different?

Does Japanese trade in manufactured goods differ from the rest-of-the world average and from the US? We use a simple industry-level gravity model and 1981–1998 data to answer this question. We construct a measure of normalized imports by dividing bilateral industry-level imports by the importer's aggregate absorption and the exporter's industry output. We find that Japan imports less than other countries, but also exports less than other countries. Relative to the US, Japanese export performance is half as strong today as it was in the mid-1980s. Bilaterally, Japan is more open to imports from the US than the US is to imports from Japan. This means that the US runs a trade surplus with Japan in normalized imports of manufactured goods. J. Japanese Int. Economies 17 (4) (2003) 507–519.     

Does a large loss of bank capital cause Evergreening? Evidence from Japan

Using the real estate lending share of the bank’s loan portfolio at the peak of the land-price bubble as an instrument for bank capital, we identify the impact of capital adequacy on the allocation of bank lending under the Basel regulatory framework. We find that, in Japan, a large loss of bank capital caused by the regulator’s excessively tough stance towards banks not only induced the contraction of the bank lending supply but also the banks’ reallocation of their lending portfolios to financially unhealthy industries with a higher concentration of non-performing loans.     

Determinants of Individual-Firm Markup in Japan: Market Concentration, Market Share, and FTC Regulations

This paper estimates individual firm level markup for more than 400 major manufacturing firms in Japan. Our estimates suggest the presence of significant market power for most of these firms, due not only to market concentration but also to the firms' own market shares, as well as advertizing and sales promotion efforts. The paper then goes on to assess systematically the impact on estimated markups of regulatory measures taken by the Fair Trade Commission (FTC) of the Japanese Government. We find that non-punitive FTC activities are directed toward the right targets and are reasonably effective, whereas injunctions, the strongest measure endowed to the FTC, has essentially no effect on the markups of firms in our sample. J. Japan. Int. Econ., Dec. 1999, 13(4), pp. 424–450. Institute of Economic Research, Kyoto University, Yoshida-Honmachi, Sakyo-ku, Kyoto 606-8501, Japan; Institute for Social and Economic Research, Osaka University; and Faculty of Economics, University of Tokyo. Copyright 1999 Academic Press.Journal of Economic Literature Classification Numbers: L13, L41.     

Fiscal Policy Effectiveness in Japan

The effectiveness of fiscal policy in Japan over the past decade has been a matter of great controversy. We investigate the effectiveness of Japanese fiscal policy over the 1976–1999 period using a structural VAR analysis of real GDP, tax revenues, and public expenditures. We find that expansionary fiscal policy, whether in the form of tax cuts or of public works spending, had significant stimulative effects. Using a new method of computing policy multipliers from structural VARs, we calculate that the multiplier on tax cuts is about 25% higher at a four-year horizon than that on public works spending, though both are well in excess of one. A historical decomposition reveals that Japanese fiscal policy was contractionary over much of the 1990s, and a significant proportion of the variation in growth can be attributed to fiscal policy shocks; accordingly, most of the run-up in public debt is attributable to declining tax revenues due to the recession. Examining savings behavior directly, we find limited evidence of Ricardian effects, insufficient to offset the short-term effects of discretionary fiscal policy. J. Japan. Int. Econ., December 2002, 16(4), pp. 536–558. Federal Reserve Bank of New York, New York, and Institute for International Economics, Washington, DC. © 2002 Elsevier Science (USA).Journal of Economic Literature Classification Numbers: E62, E65, E21.     

Determinants of Trade Credit in the Japanese Manufacturing Sector

This paper examines the determinants of trade credit in Japanese manufacturing companies. The empirical analysis presents evidence that the volume of trade credit is influenced not only by transactional factors but also by financial positions. The empirical test reveals that firms' future business prospects affect the volume of trade credit. Notably, for small firms whose liquidity is constrained, nontransactional factors such as an increase in cash flow reduce the need for trade credit. This paper also finds that trade payables act as a complement to bank loans. The quantitative relationship between trade payables and bank loans suggests that when monetary policy works in the financial markets, it also influences the trade-related credit markets. J. Japan. Int. Econ., June 2001, 15(2), pp. 160–177. Department of Economics, Fukushima University, 1 Kanayagawa, Fukushima-shi, Fukushima 960-1296, Japan. Copyright 2001 Academic Press.Journal of Economic Literature Classification Numbers: E52, G32.     

Fiscal Reconstruction and Local Interest Groups in Japan

This paper investigates the politicoeconomic properties of the fiscal reconstruction process in Japan by analyzing the dynamic game among local interest groups with concessions of region-specific privileges. Free-riding behavior of local interest groups brings numerous deficits. Our empirical evidence indicates that local privileges were powerful in the 1990s, which is the main reason fiscal reconstruction did not perform very well in the 1990s. J. Japan. Int. Econ., December 2002, 16(4), pp. 492–511. Faculty of Economics, Keio University, and Graduate School of International Relations and Pacific Studies, University of California, San Diego; and Department of Economics, University of Tokyo, Hongo, Tokyo 113-0033, Japan, and Economic and Social Research Institute, Cabinet Office of Japan, 3-1-1 Kasumigaseki, Chiyoda-ku, Tokyo 100-8970, Japan. © 2002 Elsevier Science (USA).Journal of Economic Literature Classification Numbers: H41, F13, D62.     

The Role of Monetary Policy in Japan: A Break in the 1990s?

This article documents time series evidence suggesting the case for a possible structural break in the role of Japan's monetary policy during the 1990s. It uses a simple vector autoregressive framework and offers some suggestive results: While a persistent effect of monetary policy on real output is detected over the full sample of 1975–1998 and the subsample that ends in 1993, such effect disappears with the recent subsample of the 1990s. The stability analysis also provides more specified evidence that there is a break in the reduced form dynamic system in 1995. Some interpretations are offered to intuitively support these findings. J. Japan. Int. Econ., December 2000, 14(4), pp. 366–384. Research Institute for Economics and Business Administration, Kobe University, Rokko, Nada, Kobe 657-8501, Japan Copyright 2000 Academic Press.Journal of Economic Literature Classification Numbers: E52, E32.     

The Role of Nominal Anchor Currencies in Exchange Rate Arrangements

This paper studies the evolution of exchange rate arrangements of almost all countries in the world over the period 1970–1996. It examines both officially reported and empirically observed exchange rate arrangements. Several findings are obtained. First, the relative economic size of countries under fixed exchange rate regimes has not declined as dramatically as the measure based on reported arrangements would indicate. Second, the U.S. dollar has been the most dominant, global anchor currency because many developing economies, particularly those in Asia, Latin America, and the Middle East, have attempted to stabilize their exchange rates to the dollar. Third, the reserve currency composition is determined by the constructed measure of the net currency-area size in addition to the own-economic size of the reserve currency country. Fourth, as a result of the transition to the final stage of EMU, the euro is expected to emerge as the world's second most dominant anchor currency. While the Japanese yen will continue to play a less significant role as nominal anchor, its role in East Asia is expected to rise gradually.J. Japan. Int. Econ.December 1998,12(4), pp. 334–387. World Bank, 1818 H Street, N.W., Washington, DC 20433 and Institute of Social Science, University of Tokyo, 7-3-1 Hongo, Bunkyo-ku, Tokyo 113, Japan.Copyright 1998 Academic Press.Journal of Economic LiteratureClassification Numbers F31, F33, F36.     

Depressed access to formal finance and the use of credit card debt in Chinese SMEs

SMEs (small and micro enterprises) in developing countries are in general financially depressed; business owners thus resort to other financial instruments (here, personal credit cards) when access to bank loans is prohibited. By investigating two different types of SMEs (namely, informal businesses and formal SMEs) in China, we find that SMEs turn to credit card debt as a substitute when they fail to obtain bank loans. Specifically, we find that households with informal businesses are more likely to use credit cards when their businesses are financially constrained. We also find that when financially constrained, formal SMEs are more likely to carry credit card debt and are also carrying more. This relationship persists after selection issues are addressed. However, credit card debt and bank loans are hardly perfect substitutes as these two instruments may function differently. Consistently, we find that even with bank loans, formal SMEs still carry substantial credit card debt. Additionally, compared to those with no fund need and thus no bank loan, formal SMEs with bank loans are carrying more credit card debt.     

Commercialization and mission drift: Evidence from a large Chinese microfinance institution

Front-line loan officers of microfinance institutions (MFIs) are important in acquiring information on potential borrowers and selecting them in accordance with the MFI's mission. We use a unique data set on loan officers and their loan portfolios from China's largest NGO microfinance institution to test whether officers' personal characteristics affect the size and quality of their loans. We study a period in which the institution shifted from reliance on government donations and subsidies to commercial sources of funding. Imposing more commercial incentives on loan officers could affect how they balance potentially competing objectives to serve the poor and pursue profitability. We find that loan officers who were formerly farmers or worked in local government were better able to maintain lending to poorer borrowers, without incurring substantially lower repayment rates on their loans. In short, it appears that the career backgrounds of loan officers did play a role in preventing mission drift.     

Economic Integration of Countries with International Public Goods

This paper develops a model of economic integration that is subject to random emergency costs. To mitigate the effects of these disruptions, each country that belongs to a club provides an international public good. This paper incorporates voluntary provision of public goods into a rigorous general equilibrium model of economic integration under uncertainty. It is shown that an increase in the probability of war or the penalty ratio in a club may raise the welfare and the size of the club if risk aversion with respect to private consumption is not so large. J. Japan. Int. Econ., December 1994, 8(4), pp. 530–550. Department of Economics, University of Tokyo, Hongo, Tokyo 113, Japan; and Department of Economics, Osaka University, Toyonaka, Osaka 560, Japan.     

Changes in the Sources of Modern Economic Growth: Japan Compared with the United States

The major question addressed in this paper is whether the pattern of economic growth based largely on capital accumulation preceded the pattern predominantly dependent on improvement in efficiency as measured by growth of total factor productivity. Observations on Japan extending back to the early phase of modern economic growth, together with those on the United States by Abramovitz, show that a shift from accumulation-based growth to efficiency-based growth occurred in Japan in the same manner as in U.S. economic history. This shift appears to have been associated with a change in the bias of technological progress from the use of physical capital to the use of human capital. Despite this similarity, economic growth in Japan has continued to depend more heavily on physical capital accumulation even since Japan's economy has reached a mature stage. The significant lag in shifting to efficiency-based growth seems to be characteristic of economic growth based on borrowed technology. This hypothesis is consistent with the similarity in growth patterns between Japan and newly industrializing economies in East Asia.J. Japan. Int. Econ., March 1999,13(1), pp. 1–21. School of International Politics, Economics and Business, Aoyama Gakuin University, Shibuya, Shibuya-ku, Tokyo 150-8366, Japan; and Japan Energy Research Institute, Toranomon 4-3-13, Minato-ku, Tokyo 105-0001, Japan.Copyright 1999 Academic Press.Journal of Economic LiteratureClassification Numbers: N15, O47, O57.     

How Did the Dollar Peg Fail in Asia?

In this paper, we have constructed a theoretical model in which the Asian firm maximizes its profit, competing with the Japanese and the U.S. firms in their markets. The duopoly model is used to determine export prices and volumes in response to the exchange rate fluctuations vis-à-vis the Japanese yen and the U.S. dollar. Then, the optimal basket weight that would minimize the fluctuation of the growth rate of trade balance was derived. These are the novel features of our model. The export price equation and export volume equation are estimated for several Asian countries for the sample period from 1981 to 1996. Results are generally reasonable. The optimal currency weights for the yen and the U.S. dollar are derived and compared with actual weights that had been adopted before the currency crisis of 1997. For all countries in the sample, it is shown that the optimal weight of the yen is significantly higher than the actual weight.J. Japan. Int. Econ.,Dec. 1998,12(4), pp. 256–304. Institute of Economic Research, Hitotsubashi University, Kunitachi, Tokyo 186, Japan; Department of Commerce, Hitotsubashi University, Kunitachi, Tokyo 186, Japan; Department of Commerce, Takachiho University, Suginami, Tokyo 168, Japan.Copyright 1998 Academic Press.Journal of Economic LiteratureClassification Numbers F31, F33, O11.