Real interest parity: A note on Asian countries using panel stationarity tests

Existing panel data studies of real interest parity are either unable to identify which panel members are characterised by stationary real interest differentials, or are subject to size distortion resulting from the presence of structural breaks and cross-sectional dependencies. Using a panel stationarity testing procedure recently advocated by Hadri and Rao (2008) that allows for structural breaks and cross-sectional dependency, we are unable to reject the stationarity of Asian real interest rate differentials.     

Revisiting long-run purchasing power parity with asymmetric adjustment for G-7 countries

In this study, we applied a threshold cointegration test advanced by Enders and Siklos (2001) to investigate the properties of asymmetric adjustment on long-run purchasing power parity (PPP) in G-7 countries between January 1994 and April 2010. Although there was strong evidence of long-run PPP for these G-7 countries, with the exception of Canada, the adjustment mechanism was asymmetric. These results have important policy implications for G-7 countries.     

Fluctuations in Unemployment and Industry Labor Markets

Throughout the 1990s, and particularly in the mid- to late-1990s, the Japanese employment situation went from bad to worse. We investigate the causes of rising unemployment in Japan, using data on individual workers from the “Special Survey of the Labor Force” between 1988 and 1999. This research focuses on the effect of labor market segmentation by industry on labor flows. Our findings reveal that unemployment in the construction industry and, more recently, in the service industry has contributed greatly to the national unemployment rate. We also find that most successful job transfers occur within the same industry, even though workers may experience some periods of unemployment. Finally, our results show that labor market conditions in each industry affect the probability that a worker will fall into unemployment as well as the probability that an unemployed worker will find new employment. These findings suggest that the Japanese labor market is segmented by industry and this segmentation contributed to the worsening unemployment in Japan. J. Japan. Int. Econ., December 2001, 15(4), pp. 437–464. Department of Economics, Dokkyo University, 1-1 Gakuen-cho, Soka-shi, Saitama 340-0042, Japan; Graduate School of Economics, Nagoya University, Furo-cho, Chikusa-ku, Nagoya, 464-8601, Japan. © 2001 Elsevier Science (USA).Journal of Economic Literature Classification Numbers: J63, J64.     

Japanese government debt and sustainability of fiscal policy

We construct quarterly series of the revenues, expenditures, and debt outstanding for Japan from 1980 to 2010, and analyze the sustainability of the fiscal policy. We pursue three approaches to examine the sustainability. First, we calculate the minimum tax rate that stabilizes the debt to GDP ratio given the future government expenditures. Using 2010 as the base year, we find that the government revenue to GDP ratio must rise permanently to 40–47% (from the current 33%) to stabilize the debt to GDP ratio. Second, we estimate the response of the primary surplus when the debt to GDP ratio increases. We allow the relationship to fluctuate between two “regimes” using a Markov switching model. In both regimes, the primary surplus to GDP ratio fails to respond positively to debt, which suggests the process is explosive. Finally, we estimate a fiscal policy function and a monetary policy function with Markov switching. We find that the fiscal policy is “active” (the tax revenues do not rise when the debt increases) and the monetary policy is “passive” (the interest rate does not react to the inflation rate sufficiently) in both regimes. These results suggest that the current fiscal situation for the Japanese government is not sustainable.     

Asian holding of US Treasury securities: Trade integration as a threshold

This paper empirically investigates if there have been any shifts in regimes with Asian holding of US long-term Treasury securities with particular attention paid to the role of growing regional integration in trade. A panel regression estimation of eight Asian countries for 1998–2004 confirms the striking persistency of the portfolio weight of US Treasury securities. It also reveals, without a surprise, that the traditionally strong trade link with US as well as exchange rate regime and volatility of local currency bond index explain observed overinvestment in US Treasury securities deviating from what can be warranted by the market share of the US Treasury securities. What is interesting, however, is the estimated regime switches as found when examined with a threshold estimation (Hansen, 1999). We find three thresholds which divide the sample into four regimes—a decreasing persistency as intraregional trade link becomes tighter.     

Agglomeration and productivity: Firm-level evidence from China's textile industry

Is the spatial concentration of manufacturing activity able to enhance firm-level productivity? This question is particularly relevant to production in China, which has a huge territory and population, but a skewed distribution in terms of urban–rural development. This paper aims to examine the dynamics of industrial agglomeration and the impact of agglomeration on firm-level productivity in China's textile industry by using a firm-level panel dataset from 2000 to 2005. First, the average value of the Ellison–Glaeser (EG) index (city level) is found to be approximately 0.00019. Moreover, the calculated city EG index of spatial concentration for each year exhibits a decreasing trend of spatial agglomeration for garments and other fiber products, but an increasing trend for the textile industries' agglomeration in China. The above findings are similar to the findings of Lu and Tao (2009). Secondly and importantly, this study finds an inverted U-shape relationship between agglomeration and productivity. It suggests that while industrial agglomeration enhances firms' productivity, agglomeration diseconomies may appear if the degree of agglomeration is too high.     

Cost heterogeneity and the destination of Japanese foreign direct investment: A theoretical and empirical analysis

This paper first of all develops a Cournot oligopolistic model with heterogeneous firms to examine each firm's choice between export-oriented foreign direct investments (FDI) and FDI to serve the host-country market. It is shown that there exist a critical level of efficiency such that all firms below that level choose the former and those above it the latter. The hypothesis is tested using firm-level data on 118,300 Japanese firms covering the entire manufacturing sector. Multinomial logit estimates strongly support our theoretical findings.     

The Korean stock market volatility during the currency crisis and the credit crisis

This paper studies the volatility of the Korean stock market during the Asian currency crisis of 1997–1998 and the global credit crisis of 2008–2009. We use a fad model with Markov switching heteroskedasticity, which was first proposed by Kim and Kim (1996). Using the monthly data from January 1980 to October 2009, we find that the volatility of the transitory component of the stock return, or fads, increased during the currency crisis, but did not rise much during the credit crisis. It implies that the stock price fluctuations were not driven by irrational sentiments during the recent global crisis as much as during the former crisis. However, when we consider the dollar value of the Korean stock index in order to estimate the volatility that foreign investors confront, we find that the volatility of the transitory component was raised during the credit crisis as well as during the currency crisis. That is, foreign investors experienced greater volatility than domestic investors in the recent financial market turmoil. This asymmetric volatility that domestic and foreign investors face is one of the characteristics of the credit crisis.For more detailed analysis, the same model was applied to the weekly data from January 2005 to October 2009 and provided the result that the data measured by won–dollar exchange rates were more increased than the raw data. It holds that foreign investors confronted much greater volatility than domestic investors while the stock volatility was relatively lower in the credit crisis state than in the currency crisis state.     

Surfing the waves of globalization: Asia and financial globalization in the context of the trilemma

Using the “trilemma indexes” developed by Aizenman et al. (2010) that measure the extent of achievement in each of the three policy goals in the trilemma—monetary independence, exchange rate stability, and financial openness—we examine how policy configurations affect macroeconomic performances, with focus on the Asian economies. We find that the three policy choices matter for output volatility and the medium-term level of inflation. Greater monetary independence is associated with lower output volatility while greater exchange rate stability implies greater output volatility, which can be mitigated if a country holds international reserves (IR) at a level higher than a threshold (about 20% of GDP). Greater monetary autonomy is associated with a higher level of inflation while greater exchange rate stability and greater financial openness could lower the inflation rate. We find that trilemma policy configurations affect output volatility through the investment or trade channel depending on the openness of the economies. Our results indicate that policy makers in a more open economy would prefer pursuing greater exchange rate stability while holding a massive amount of IR. Asian emerging market economies are found to be equipped with macroeconomic policy configurations that help the economies to dampen the volatility of the real exchange rate. These economies’ sizeable amount of IR holding appears to enhance the stabilizing effect of the trilemma policy choices, and this may help explain the recent phenomenal buildup of IR in the region.     

A politically feasible social security reform with a two-tier structure

This paper investigates the welfare implications and political feasibility of social security reforms with a two-tier structure in Japan. We evaluate social security reforms from two points of view: (i) the ex-ante expected value of future generations, and (ii) whether current generations prefer reform to the status-quo system, which we call political feasibility. To evaluate the reforms, we use a large-scale overlapping generations model with idiosyncratic income risk and a two-tier structure. The first tier guarantees a basic pension and the second tier consists of the earnings-related part. Calibrating the parameters of the model to the Japanese economy, we compute the transition path and the two welfare criteria. We find that, given the two-tier structure in Japan, an increase in the basic pension and the abolition of the earnings-related part of the social security system improve the welfare of future generations, and ensures political feasibility when a consumption tax is the source of revenue.     

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.     

An analysis on technical efficiency in post-reform China

This paper employs a fully nonparametric stochastic frontier model with time and individual effects to study technical efficiency in China's post-reform economy. The panel data cover China's thirty provinces for the period of 1985–2008. The empirical results show that the average output elasticity of labor is larger than the other two inputs of capital and human capital. Based on the specified inefficiency Tobit model, the factor analysis on technical efficiency shows that the time effects of technical efficiency in China's post-reform economy are significantly contingent on the factors. There exists significant regional differences in technical efficiency in China's economic development, and a number of policy implications can be drawn.     

Unemployment and Labor Market Institutions: An Empirical Analysis

The development of the unemployment rate differs substantially between OECD countries. In this paper we investigate to what extent these differences are related to labor market institutions. In our analysis we use data of eighteen OECD countries over the period 1960–1994 and show that the way in which institutions interact is important. J. Japan. Int. Econ., December 2001, 15(4), pp. 403–418. Department of Economics, CentER, Tilburg University and Institute for Labour Studies (OSA), The Netherlands. © 2001 Elsevier Science (USA).Journal of Economic Literature Classification Numbers: E24, J68.     

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.     

The End of Lifetime Employment in Japan?: Evidence from National Surveys and Field Research

Using both quantitative data from national surveys and qualitative data from our recent field research, this paper provides evidence on the recent transformation of Japan's celebrated practice of lifetime employment (or implicit long-term employment contracts for the regular workforce). Overall, contrary to the popular rhetoric of the end of lifetime employment, evidence points to the enduring nature of this practice in Japan. Specifically, we find little evidence for any major decline in the job retention rates of Japanese employees from the period prior to the burst of the bubble economy in the late 1980s to the post-bubble period. In general, our field research corroborates the main finding from the job retention rates by describing vividly that large firms in Japan have been trying to accomplish their restructuring and downsizing targets by relying heavily on transfers of their employees to their subsidiaries and related firms and hiring cuts, thus avoiding layoffs. Last, the burden of downsizing appears to fall disproportionately on young workers and middle-age workers with shorter tenure. J. Japan. Int. Econ., December 2001, 15(4), pp. 489–514. Department of Economics, Colgate University, Hamilton, New York 13346; Center on Japanese Economy and Business, Columbia Business School, New York; and TCER. © 2001 Elsevier Science (USA).Journal of Economic Literature Classification Numbers: J63, J64, J41, O53.     

The usefulness of earnings versus book value for predicting stock returns and cross corporate ownership in Japan

Using a sample of Japanese firms, this paper evaluates the usefulness of the two fundamental products of an accrual accounting system, namely accrual earnings and book value of equity for predicting stock returns. Our analysis shows that both earnings and book value for Japanese firms have the ability to provide for profitable trading strategies or improved portfolio decisions, and that relative to the trading strategy based on earnings or book value alone, the trading strategy based on a combination of both earnings and book value generates substantially higher returns for all cases. This suggests that book value (or earnings) captures certain aspects of equity values that are not captured by earnings (book value). Our multivariate regression results further indicate that the predictive ability of earnings is dominated by that of book value. Finally, it is found that the predictive ability of book value is sensitive to the degree of cross corporate ownership, while it is insensitive to the degree of real estate holding.     

A new anatomy of the retirement process in Japan

In Japan, retirement is a gradual process that transpires over a particularly long period of time. Using large scale micro-level datasets from the Survey of Employment of the Elderly compiled by the Japanese government, we provide some stylized facts on the development of retirement behavior since the 1980s and explore factors affecting the individual retirement decision. First, we observed a general declining trend in the proportion of retired individuals aged 55–59 (especially females) while the proportion of retired individuals aged 65–69 (especially males) increased. Second, the survival analysis on actual retirement age shows that those who are more educated are more likely to retire earlier and those who experienced mandatory retirement are less likely. Third, the survival analysis on the expected retirement age shows that individuals who are satisfied with their job in terms of nonmonetary rewards are less likely to retire earlier.     

Job tasks and wages in the Japanese labor market: Evidence from wage functions

Based on the microdata from the Basic Survey on Wage Structure and the original survey, we estimate the Mincerian wage function, incorporating job tasks, to examine the importance of job task wage premiums as well as long-term changes in the Japanese labor market. In the estimation, we found that the association between abstract tasks and wages is positive and that a one standard deviation increase in the abstract task scores was associated with a 21.2% wage premium, while that of routine and manual task wage premiums are negative. We also found that the total explanatory power of three task scores (routine, abstract, and manual tasks) is higher than that of the education dummies or the major occupation group dummies. We also confirmed two testable implications from the Roy model regarding the workers’ self-selection into occupations in the Japanese labor market. These findings are similar to those obtained by Autor and Handel (2013). On the other hand, we found no major changes between 2005 and 2016 in the coefficients of routine, abstract, or manual task scores as well as their explanatory powers in the wage function. We then observed that demand for labor increased in many occupations involving many non-routine or manual tasks, but at the same time, the supply of labor to those occupations also increased. Therefore, we discussed that the change in labor demand and supply may be one of the reasons for the stable relationship between job tasks and wages.     

Fiscal policy switching in Japan, the US, and the UK

This paper estimates fiscal policy feedback rules in Japan, the United States, and the United Kingdom for more than a century, allowing for stochastic regime changes. Estimating a Markov-switching model by the Bayesian method, we find the following: First, the Japanese data clearly reject the view that the fiscal policy regime is fixed, i.e., that the Japanese government adopted a Ricardian or a non-Ricardian regime throughout the entire period. Instead, our results indicate a stochastic switch of the debt-GDP ratio between stationary and nonstationary processes, and thus a stochastic switch between Ricardian and non-Ricardian regimes. Second, our simulation exercises using the estimated parameters and transition probabilities do not necessarily reject the possibility that the debt-GDP ratio may be nonstationary even in the long run (i.e., globally nonstationary). Third, the Japanese result is in sharp contrast with the results for the US and the UK which indicate that in these countries the government’s fiscal behavior is consistently characterized by Ricardian policy.     

China''s land arrangements and rural labor mobility

Chinese farm families under the Household Responsibility System have the land use-rights but not the rights of alienation. If permanently leaving agriculture, they have to return the land to local authorities and consequently give up a stream of future land earnings. This paper analyzes the deterrent effect of this land arrangement on labor mobility by constructing a household model which considers both part-time farming and permanent migration decisions. The implications of the model are consistent with the recent Chinese experience of rural floating population in cities and the rapid growth of rural nonagricultural employment.