Capital utilization in Japan's lost decade: A neoclassical interpretation

This paper attempts to reconcile the controversy regarding Japan's total factor productivity during its slump in the 1990s by clarifying the role of capital utilization. Hayashi and Prescott (2002) emphasized that the decline in the exogenous total factor productivity growth rate was the main cause. However, some empirical studies have also pointed out that the fall in capital utilization rates accounted for a large part of the decline in the total factor productivity growth rate. In this study we incorporate variable capital utilization into a neoclassical growth model, calculate total factor productivity taking into account capital utilization, and simulate the aggregate output and capital-output ratio. We found that although our total factor productivity growth rate in the 1990s is consistent with empirical studies, our simulation can explain the observed data. This result indicates the importance of capital utilization rates as a source of propagation during Japan's depression.     

World public debt and real interest rates

Real interest rates appear to have risen in virtually all industrializedcountries in the 1980s and 1990s relative to levels that prevailedin earlier decades. There is concern that this may reflect higherpublic debt, which is crowding out private-sector activity.There has also been increasing international capital marketintegration, implying that interest rates in any country maybe sensitive to global fiscal developments. This paper estimatesthe effects of such fiscal developments on real interest ratesin nine industrial countries. The results imply that the increasein OECD-wide government debt since the late 1970s was a majorfactor in the rise in real interest rates.     

Bubble into reallocation: How bubbles improve capital allocation in China

This paper develops a theoretical framework to shed lights on the relations between the segmented financial market and the housing bubble in China. In our framework, capital misallocation across firms plays a central role. The segmented financial market causes discrimination against private enterprises and favoritism to state-owned firms. This biased financial system not only gives rise to capital misallocation across firms but also significantly pushes down the equilibrium interest rate in the formal financial market. The overly low interest rate in the formal financial market causes a rational bubble in a dynamically efficient economy. More importantly, the bubble improves capital allocation across firms by crowding out inefficient investment in the state-owned sector. Despite the role of improving capital allocation, bubbles may still reduce welfare by crowding out aggregate capital.     

Interindustry effects of productivity growth in Japan: 1960–2000

Combining conventional sectoral growth accounting and the static open input–output price model, we analyze the sources of growth of product prices in Japan during the period 1960–2000. Using the input–output framework, we take into account not only the effects of factor costs and productivity within a sector, but also their impacts outside of the sector. We find that Japan's deflation in the 1990s was characterized by low growth of wage rates, low productivity growth, and a low rate of return on capital. Until 1990, productivity improvements compensated for factor cost pressures on output price, especially the rapid growth of labor cost. In contrast, during the 1990s, decreasing rates of return on capital, not productivity improvements, canceled out the inflationary effect of wage growth. J. Japanese Int. Economies 19 (4) (2005) 568–585.     

Tax reforms and stock return volatility: The case of Japan

Although global financial turmoil in recent years has resulted in renewed interest in taxing financial markets, the existing evidence is inconclusive regarding the effect of stock transaction taxes (STT) on stock return volatility. In this respect, Japan provides an excellent opportunity to address the issue, as the country enacted major tax reforms during the long recession beginning in the early 1990s, not only abolishing STT in 1999, but also reducing the capital gains and dividend taxes in 2003. The present paper exploits these tax reform episodes and examines whether and how they affected stock return volatility. In so doing, it employs GARCH-type models using standard daily stock data, as well as HAR models based on realized volatility constructed from high-frequency, intraday data. The estimation results are consistent with the views that, in line with some earlier findings, the STT abolition in 1999 reduced volatility, and that the tax reforms in 2003 also reduced volatility through a cut in the dividend tax, but not in the capital gains tax.     

Capital Inflows Problem in Selected Asian Economies in the 1990s Revisited: The Role of Monetary Sterilization*

This paper develops a simple model to examine the reasons behind the capital inflow surges into selected Asian economies in the 1990s prior to the financial crisis of 1997–98. The analytical model shows that persistent uncovered interest differentials and consequent capital inflows may be a result of complete monetary sterilization, perfect capital mobility, sluggish response of interest rates to domestic monetary disequilibrium, or some combination of all three. Using the model as an organizing framework, the paper undertakes a series of related simple empirical tests of the dynamic links between international capital flows, the extent to which they are sterilized and uncovered interest rate differentials in the five crisis‐hit economies (Indonesia, Korea, Malaysia, the Philippines and Thailand) over the period 1990:1–1997:5.     

Endogenous capital utilization in a neoclassical growth model

This paper introduces a variable rate of capital utilization and depreciation into a modified Ramsey-type neoclassical growth model via the well-known concept of pure user cost. The optimal utilization rate is found to be determined by the opportunity cost of holding capital or the net real interest rate. As a consequence, this rate may vary in the short run, so total services of capital become a control rather than a state variable. Furthermore, the introduction of a variable utilization rate yields a slower rate of convergence toward the steady state, inducing more persistence in the transitional dynamics. To illustrate how the endogenous choice of utilization acts on the system, some simulations are carried out, including the transition period when there is a temporary fall in the exogenous real interest rate.     

CAPITAL FLOWS AND EXPORT EXTERNALITIES: AN EAST ASIAN CURE FOR THE DUTCH DISEASE?*

The analysis so far suggests several conclusions regarding policy under externalities in tradables production. It shows that conventional profit-maximizing solutions lead to too much investment, too much “up front” consumption, high period 1 real exchange rates, and underproduction of tradables. In this setting, it is possible that an improvement in an economy's access to foreign capital will lead to welfare losses. These distortions are most efficiently corrected by a tradables output subsidy, equal to the externality. This subsidy should be increased if the economy's access to foreign capital markets improves. In the absence of such subsidies, however, incentives to reduce investment and postpone consumption may be appropriate second-best policies. These policies, in effect, drive a wedge between rates of return on investment and foreign interest rates. Therefore the optimal policy will also require controls on foreign capital seeking to take advantage of higher interest rates at home than abroad.     

Government budget deficits,nominal andex ante real long-term interest rates in the U.K., 1960:1–1990:2

This paper explores the impact of government budget deficits on the U.K. nominal and ex ante real long-term interest rates over the period from 1960:1 to 1990:2 utilizing an open and closed economy IS-LM model. An open economy IS-LM model indicates that nominal and ex ante real long-term interest rates are affected by the expected rate of inflation, the real money stock, the real government budget deficit, the real government spending, and the real balance of trade.The evidence presented suggests that increases in the U.K. budget deficits do contribute significantly to increases in nominal and ex ante real long-term interest rates. This implies that rising nominal and ex ante real long-term interest rates, as a result of high government budget deficits, would crowd out private investment and deter capital formation and long-term economic growth.     

Business cycle accounting for the Japanese economy

We conducted business cycle accounting (BCA) using the method developed by Chari, Kehoe, and McGrattan (Chari, V.V., P.J. Kehoe, E.R. McGrattan, 2002a. Accounting for the Great Depression. Am. Econ. Rev. 92 (2), 22–27) on data from the 1980s to 1990s in Japan and from the interwar period in Japan and the United States. The contribution of this paper is two-fold. First, we find that labor wedges may have been a major contributor to the decade-long recession in the 1990s in Japan. Assuming exogenous variations in the share of labor, we find that the deterioration in the labor wedge started around 1990, which coincides with the onset of the recession. Second, we performed an alternative BCA exercise using the capital wedge instead of the investment wedge to check the robustness of BCA implications for financial frictions. The accounting results with the capital wedge imply that financial frictions may have had a large depressive effect during the 1930s in the United States. This implication is the opposite of that from the original BCA findings.     

International monetary transmission in East Asia: Floaters,non-floaters,and capital controls

This paper analyzes the impacts of the United States (US) monetary shocks on East Asian countries using structural vector-autoregression (VAR) model. We find that the impacts of the US monetary shocks on East Asian domestic interest rates and exchange rates contradict conventional wisdom. The conventional exchange rate channel is unlikely to play much role in the transmission of the US monetary policy shocks to floaters in East Asian countries, excluding Japan. In these countries, the domestic interest rates respond strongly to the US interest rate changes, by giving up monetary autonomy, probably because of fear of floating. However, the domestic interest rate does not respond much in countries with fixed exchange rate regimes and capital account restrictions, such as China and Malaysia. This may suggest that the countries with fixed exchange rate regimes enjoy a higher degree of monetary autonomy, most likely with the help of capital account restrictions.     

Consumer confidence and economic stagnation in Japan

This paper examines whether self-fulfilling expectations could have been the cause of the economic stagnation experienced by Japan in the 1990s. A real business cycle model with indeterminacy of equilibria and variable capital utilization is used to simulate the economy of Japan. Driven solely by expectation shocks, the model can replicate the economic bubble that occurred in the late 1980s and the prolonged slowdown that occurred in the 1990s. These results suggest that expectations should not be excluded as a possible source of Japan's recent economic difficulties.     

Changing factor market conditions in South Africa: The capital market – a sectoral description of the period 1970–97

This article explores changing conditions in South African real capital markets. Noteworthy is the evidence of strong restructuring in this market during the 1990s. Whereas the 1970s and 1980s showed the best investment performance among primary commodity sectors and sectors with strong parastatal involvement, the highest investment rates of the 1990s have been associated with the manufacturing industry. We show that the real user cost of capital and capital productitivity contribute plausible determinants of investment rates in South Africa. The extent to which market forces are allowed to bring in line marginal cost and marginal return on capital appears to influence the sustainability of investment.     

The case for price level or inflation targeting—What happened to monetary policy effectiveness during the Japanese disinflation?

This paper examines whether price level or inflation targeting would have been appropriate policy choices for Japan during its disinflation and deflation period. We employ Markov switching and structural vector autoregressions, together with structural IS equations, to investigate monetary policy effectiveness during the Japanese disinflation. We find evidence of regime switching in the mid-1990s in a model including the nominal policy interest rate. When monetary policy shocks are identified by using the McCallum rule for monetary base, a monetary expansion is found to have a statistically significant impact on prices. Moreover, a lower real ex ante interest rate can still stimulate the economy despite the zero lower bound on nominal interest rates.     

除息日股票价格波动——基于国际市场的对比实证分析

本文探讨了四个不同地域(美国、英国、日本和中国)的资本市场在金融危机时期,其代表性的蓝筹股在除息日的价格波动行为。实证结果发现:在除息日,对于纽约和上海交易所,股票价格的下跌量等同于红利数额并且没有证据表明超额收益和短期交易的存在;对于东京交易所,股价下跌少于股息量,恰恰相反,伦敦交易所的股票下跌量超过股息额,这表明上述两个交易所的股票在除息日前后存在着异常收益和短期套利交易行为。     

Bank capital shocks and portfolio risk: Evidence from Japan

Despite the downward trend of land prices and the ex post low return on real estate loans, Japanese banks increased their lending to the real estate sector during the 1990s. We argue that this phenomenon can be explained by the risk-shifting incentives of banks and discover that banks with low capital-to-asset ratios and low franchise value chose high-risk assets such as real estate loans. Unlike previous studies, we show that the capital–risk relationship is non-linear and changes from positive to negative as franchise value falls. We also find that a capital adequacy requirement did not prevent risk-taking behavior of under-capitalized banks since they then just issued more subordinated debts to meet this requirement. In contrast, government capital injections led banks to reduce risky loans at the margin. Recapitalization by issuing subordinated debts helped banks recover their capital losses and mitigated the credit crunch, but consequently allowed them to increase their exposure to the real estate sector and worsened the bad loan problems.     

Mortality, interest rates, investment, and agricultural production in 18th century England

This paper shows that the exogenous decline of adult mortality at the end of the 17th century can be one of the causes driving both the decline of interest rate and the increase in agricultural production per acre in pre-industrial England. Following the intuition of the life-cycle hypothesis, I claim that the increase in adult life expectancy must have implied less farmer impatience and it could have caused more investment in nitrogen stock and land fertility, the increase in agricultural land, and higher production per acre. I analyze this dynamic interaction using an overlapping generations model and show that the evolution of agricultural production and capital rates of return predicted by the model coincide fairly well with their empirical pattern.     

Technical and Scale Efficiencies for Chinese Rural Credit Cooperatives: A Bootstrapping Approach in Data Envelopment Analysis

This paper uses Markov-switching techniques to examine the presence of different market conditions on the Shanghai A-share market since the start of active trading in the mid-1990s. The originality of the paper lies in the identification of three contrasting regimes: a speculative market, a bull market and a bear market. Overall, the ‘Casino’ character of the Chinese stock market is the main feature that is substantiated by the present paper. However, the bull market regime is always a buffer zone between the other two regimes. After early 1997, an investor with a weekly horizon most of the time finds herself in the bear market and makes capital losses. Only during very short periods of ‘luck’ does she make substantial capital gains, which on average will compensate her for the losses.     

Unit root tests with double trend breaks and the 1990s recession in Japan

This paper applies to Japanese macroeconomic series unit root tests that allow for the possibility of up to two endogenous break points. The presence of a single structural break around the first oil price shock in 1973 turns out to be very sensitive to the amplitude of the data sample and, in particular, it disappears when one extends the sample to the observations of the 1990s. This may indicate the presence of a second structural break, the existence of which is tested with a unit root test with a two-break alternative hypothesis for which we compute finite sample critical values. Interestingly enough, the hypothesis of the absence of a second break occurring in the 1990s can be rejected. Such results seem to indicate that the deep recession of the 1990s in Japan may not be the reflection of a negative output-gap, but that of a fall in the growth trend of output as a consequence of a huge productivity shock.     

The effects of demographic changes on the real interest rate in Japan

What are the effects of demographic changes on the real interest rate in Japan? We present a dynamic general equilibrium model in which demographic changes are captured by exogenous changes in the ratio of workers to the total population. Our model predicts that a decline in this ratio in the process of population aging lowers the real interest rate; and the demographic impact on the real interest rate is amplified by a fall in land prices in the presence of collateral constraints. The model is simulated with the realized and forecasted changes in the working-age population ratio, the TFP growth, and government spending in Japan. Our results indicate that the TFP growth is the main source of variations in the real interest rate, but the demographic factor is also quantitatively important especially for its long-term movements.