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.     

Agglomeration Economies and a Test for Optimal City Sizes in Japan

We estimate aggregate production functions for metrpolitan areas in Japan to derive the magnitudes of agglomeration economies. Using the estimates of agglomeration economies, we test if Japanese cities, in particular, Tokyo, are too large.J. Japan. Int. Econ.,December 1996,10(4), pp. 379–398. Faculty of Economics, University of Tokyo, 7-3-1 Hongo, Bunkyo-ku, Tokyo 113, Japan; Socio-Economic Research Center, Central Research Institute of Electric Power Industry, 1-6-1 Ohtemachi, Chiyoda-ku, Tokyo 100, Japan; and Institute of Socio-Economic Planning, University of Tsukuba, 1-1-1 Tennodai, Tsukuba, Ibaraki 305, Japan.     

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.     

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.     

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.     

Impacts of the Basle Capital Standard on Japanese Banks' Behavior

This paper examines how the risk-based capital standards, the so-called Basle Accord, influenced 87 major Japanese banks' behavior between 1990 and 1993. As the Japanese stock prices fell, banks' latent capital gains, which is part of tier II capital, became smaller. Empirical findings are consistent with a view that banks with lower capital ratios tended to issue more subordinated debts (tier II) and to reduce lending (risk assets). J. Japan. Int. Econ., September 2002, 16(3), pp. 372–397. Institute of Economic Research, Hitotsubashi University, Kunitachi, Tokyo 186-8603, Japan; and Faculty of Economics, Meiji Gakuin University, Tokyo 108-8636, Japan. © 2002 Elsevier Science (USA).Journal of Economic Literature Classification Numbers: G18, G21, G28.     

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.     

Quantitative easing and Japanese bank equity values

One of the primary motivations offered by the Bank of Japan (BOJ) for its quantitative easing program—whereby it maintained a current account balance target in excess of required reserves, effectively pegging short-term interest rates at zero—was to maintain credit extension by the troubled Japanese financial sector. We conduct an event study concerning the anticipated impact of quantitative easing on the Japanese banking sector by examining the impact of the introduction and expansion of the policy on Japanese bank equity values. We find that excess returns of Japanese banks were greater when increases in the BOJ current account balance target were accompanied by “non-standard” expansionary policies, such as raising the ceiling on BOJ purchases of long-term Japanese government bonds. We also provide cross-sectional evidence that suggests that the market perceived that the quantitative easing program would disproportionately benefit financially weaker Japanese banks. J. Japanese Int. Economies 20 (4) (2006) 699–721.     

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.     

Biased Technological Change and Japanese Manufacturing Employment

This paper examines the effect of technological change on the demand for production and nonproduction workers of the Japanese manufacturing industries since the 1980s. First, a decomposition of the change in the share of nonproduction workers in total employment into between-industry shifts and within-industry shifts reveals that the within-industry shifts were dominant in the 1980s. Second, cross-sectional regressions show that investment in computers has had a significant impact on increasing the share of the wage-bill held by nonproduction workers. These findings suggest that skill-biased technological change is at work in Japanese manufacturing industries. J. Japan. Int. Econ., September 2001, 15(3), pp. 298–322. Development Bank of Japan, 1-9-3 Otemachi, Chiyoda-ku, Tokyo 100-0004, Japan. Copyright 2001 Academic Press.Journal of Economic Literature Classification Numbers: J23, J31, O30.     

International Trade and Bank Groups: Welfare Enhancing or Welfare Reducing?

In international competition, are bank groups efficiency enhancing or efficiency reducing? This paper attempts to clarify this issue by asking instead: efficiency for whom? In a simple, illustrative model, this paper shows that bank groups can be efficiency enhancing for the bank and the member firms, but hurting its competitor. More important global welfare rises with bank groups. These results are robust when we allow the bank and the member firm to bargain over its loan rate, when bank groups can be formed endogenously and when there are multiple exporters. Results in this paper suggest alternative interpretations of existing econometric results concerning the role of Japanese groups in U.S.–Japan trade. J. Japan. Int. Econ., June 2002, 16(2) pp. 212–226. Department of Economics, University of California, Santa Cruz, Santa Cruz, California.     

Are Corporate Financing Decisions Different in Japan? An Empirical Study on Capital Structure

This paper investigates empirically how Japanese firms determine capital structure. I show that a firm's capital structure in Japan can be explained, to some extent, by real factors derived from theories of the capital structure. I also find remarkable results showing that the capital structure of Japanese firms is substantially affected by the institutional and regulatory characteristics of Japanese capital markets. Therefore, I conclude that both real and institutional factors are important determinants of corporate financing decisions in Japan. This result indicates that it is necessary to consider both theories and institutional features in each country to fully understand a firm's capital structure choice. J. Japan. Int. Econ., September 1999, 13(3), pp. 201–229. School of Commerce, Waseda University, 1-6-1, Nishiwaseda, Shinjuku-ku, Tokyo, 169-8050, Japan. Copyright 1999 Academic Press.Journal of Economic Literature Classification Numbers: G15, G32, G38.     

Reform of the Japanese banking system

Japan has experienced a decade-long economic stagnation with a distressed banking sector in the 1990s. The absence of a credit culture to rigorously assess and price credit risks of borrowers, aggravated by weak prudential and supervisory frameworks, in the 1980s, the collapse of the asset price bubble in the early 1990s, and the lack of decisive, comprehensive strategy to address the banking sector problem at an early stage were largely responsible for the emergence of banking sector problems. All of these allowed a systemic banking crisis to emerge in 1997–98 and a large output loss during 1998–2002. The crisis ultimately prompted the government to take a more aggressive policy to tackle the problem. Considerable progress has been made since then on banking sector stabilization, restructuring, and consolidation. The regulatory and supervisory framework has been strengthened in a way consistent with an increasingly market-oriented, globalized environment. As a result, the worst is over in the Japanese banking system, setting the stage for sustained economic recovery. Though bank capital may still be inadequate, safety nets are in place, and credit allocation has been made more rational. Remaining risks are limited to regional and smaller institutions that are vulnerable to weak, local economic conditions and hikes of the long-term interest rate.

Bank Charter Value and the Viability of the Japanese Convoy System

This paper compares the performance of a convoy banking system, similar to that whch prevailed in Japan, to a fixed-premium deposit insurance regime. While neither regime is generally preferable over the other, the performance of the convoy system is shown to be more sensitive to changes in bank charter values and the overall health of the banking system under fairly general conditions. The recent breakdown of the convoy system may therefore be partly attributable to adverse movements in these characteristics in Japan. J. Japan. Int. Econ., September 2000, 14(3), pp. 149–168. Federal Reserve Bank of San Francisco, P.O. Box 7702, San Francisco, California 94120. Copyright 2000 Academic Press.Journal of Economic Literature Classification Numbers: G21, G28.     

Transition from School to Work in Japan

Using retrospective data of young people's work experience in Japan, this paper found that initial labor market conditions, i.e., when workers first enter the labor market after permanently leaving school, have a significant lasting impact on the employment experiences of workers in their teens and twenties. An increase in the unemployment rate at the time of labor market entry reduces the probability of gaining full-time regular employment and, more important, increases the future probability of workers of leaving employers by lowering the quality of job matches. It was also found that the vocational guidance or recommendations workers received at school could be effective in raising the quality of job matches. The adverse effect of initial unemployment rates on employment opportunities was most profoundly observed among female college graduates. J. Japan. Int. Econ., December 2001, 15(4), pp. 465–488. Faculty of Economics, Gakushuin University, 1-5-1 Mejiro Toshima-ku, Tokyo 171-8588, Japan; and Faculty of Economics, Meiji Gakuin University, 1-2-37 Shirokane-dai Minato-ku, Tokyo 108-8636, Japan. © 2001 Elsevier Science (USA).Journal of Economic Literature Classification Numbers: J24, J63, J64.     

The nexus of finance and GDP growth in Japan: Do real interest rates matter?

This study empirically investigates whether real interest rates are associated with a stronger or weaker finance–growth relationship in the Japanese economy, where the relationships between banks and firms are characterized by main bank relationships and keirestu as well as a government implemented low interest rate policies since the early 1990s. Several econometric models are used to obtain empirical robustness. This study confirms the substantial effects of real interest rates on finance–growth relationships in Japan. In the regime with higher (lower) real interest rates, the banking system has significantly positive (adverse) effects on output growth. Empirical evidence exists that a low interest rate policy is an important hindrance to the ability of the banking system to impact economic growth in Japan.     

The Interdependent Telecommunications Demand and Efficient Price Structure

Rapid growth of mobile telecommunications is a widespread phenomenon in the world. This emerging network is supposed to be closely interdependent with the wire-based network. In this paper, after reviewing the Japanese regulatory scheme for mobile telecommunications, we investigate the interdependency by estimating both price elasticities and network effects among them. The own-price elasticities are relatively high, and the substitution, as well as the network, effect is substantial. Moreover, the resulting super-elasticities of mobile telephones are consistently larger than those of fixed-line telephones. These findings indicate that the Ramsey optimal price structure may have required a lower price–cost margin of mobile networks, relative to that of fixed-line networks. It should be noted, however, that the difference in super-elasticity between the two networks seems to have substantially diminished during our sample period. J. Japan. Int. Econ., December 1999, 13(4), pp. 311–335. Shinshu University, Nagano 390-8621, Japan and InfoCom Research Institute, Tokyo 107-0062, Japan. Copyright 1999 Academic Press.Journal of Economic Literature Classification Numbers: D12, L43, L96.     

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.     

Output-Inflation Trade-Off at Near-Zero Inflation Rates

The purpose of this paper is to provide new evidence about the cost of near-zero inflation using Japanese data. We test the hypothesis that the short-run Phillips curve becomes flatter as the rate of inflation approaches zero. In implementing the test, we pay special attention to how to control for other factors affecting the rate of inflation. First, we use the skewness of the distribution of relative-price changes as a measure of supply shocks. Second, we use information contained in the cross-prefecture Phillips curve to control for changes in the expected rate of inflation. Through a series of empirical analyses, we find evidences consistent with the hypothesis. In particular, we find that the estimated slope in the 1990s is smaller than before. J. Japan. Int. Econ., December 2000, 14(4), pp. 304–326. Research and Statistics Department, Bank of Japan and Institute of Economic Research, Hitotsubashi University. Copyright 2000 Academic Press.Journal of Economic Literature Classification Numbers: E31, E50     

Long-Run Relationship between Consumption and Income in Japan: Tests of the Deterministic Cointegration Restriction

This paper reexamines two versions of the permanent income hypothesis derived from R. E. Hall (1978, J. Polit. Econ.86, 971–987) and R. G. King, C. L. Plosser, J. H. Stock, and M. W. Watson (1991, Amer. Econ. Rev.81, 819–840) using Japanese quarterly data. The main focus is on the relationship between stochastic and deterministic trends of consumption and income. It is found that the deterministic cointegration restriction implied by the two models is strongly rejected in Japan in contrast to the U.S. result, and the rejection of King et al.'s model depends on the existence of a trend break. This finding suggests that the postwar Japanese economy experienced the change in a steady state path considered by the neoclassical growth model. J. Japan. Int. Econ., June 2002, 16(2) pp. 253–278. Graduate School of Economics, Hitotsubashi University, 2-1 Naka Kunitachi, Tokyo 186-8601, Japan. © 2002 Elsevier Science (USA).Journal of Economic Literature Classification Numbers: C32, E21.