Quality change and productivity improvement in the Japanese economy

This paper provides a new view of the rate of productivity growth in Japan, and the contribution of productivity improvements to the growth of the Japanese economy. Many studies point to the high rates of labour and total factor productivity growth in Japan during the early post-War period as the principle cause of the rise of the Japanese economy. The present study, however, emphasises the role of quality change in Japan’s development. In order to do this, quality-constant measures of both inputs and outputs are derived using time series hedonic regression techniques. These quality-constant series are then used to revise the traditional partial and total factor productivity measures. We demonstrate that all of the traditional measures of productivity are biased insofar as their construction does not fully account for quality change. The essential message is that, in Japan, quality change accounts for significant parts of the true growth in both inputs and outputs, leading to underestimation of their growth rates in the official statistics. However, given the nature of the ratios employed in measuring productivity, the implications for factor productivity growth are more complex.