Economic Analysis Series No.193
THE ECONOMIC ANALYSIS

March, 2017
(Foreword)
Special Editor Shin-ichi FUKUDA
(Editorial)
Macroeconomics under Secular Stagnation:
Some Overviews on Recent Studies and Implications for the Japanese Economy
Special Editor Shin-ichi FUKUDA
(Thesis)
Population Dynamics, Longer Life Expectancy, and Child-Rearing Policies in an R&D-based
Growth Model with Overlapping Generations
Koichi FUTAGAMI
Kunihiko KONISHI
Why Does Capital Investment by Japanese Firms Remain Sluggish?
A Reexamination from Secular Stagnation Perspective
Jun-ichi NAKAMURA
Uninsured Risk, Stagnation and Fiscal Policy
R. Anton BRAUN
Tomoyuki NAKAJIMA
Macroeconomic Implications of Low Japanese Government Bond Yields
Masaya SAKURAGAWA
Yukie SAKURAGAWA
Global Funds Glut, World Interest Rates and Secular Stagnation
Yoichi MATSUBAYASHI
The Effects of Quantitative Easing on Bank Lending: The Case of Japan
Minoru TACHIBANA
Hitoshi INOUE
Yuzo HONDA
Dynamics of Expected Inflation in Japan
Tatsuyoshi OKIMOTO
Japanese Monetary Policies and Spillovers to Asia: A Global VAR Approach
Robert DEKLE

(Abstract)

Population Dynamics, Longer Life Expectancy, and Child-Rearing Policies in an R&D-based Growth Model with Overlapping Generations

Koichi FUTAGAMI, Kunihiko KONISHI

This study constructs an overlapping generations model with R&D activities and endogenous fertility. We demonstrate that there is a trap region where the economy cannot achieve sustainable growth. Moreover, this study shows that an increase in life expectancy expands the region where R&D is conducted, but shrinks the region where population increases. We consider the effects of child-rearing policies to expand the region where population increases. We show that these policies have the opposite effect of increasing life expectancy if the tax burden effect is small. However, a strengthening of child-rearing policies can reduce both regions where R&D is conducted and where population increases if the tax burden effect is large.

JEL Codes:J13, O30, O41
Keywords:R&D, Fertility, Increasing life expectancy, Child-rearing policies

Why Does Capital Investment by Japanese Firms Remain Sluggish? :
A Reexamination from Secular Stagnation Perspective

Jun-ichi NAKAMURA

In the Japanese economyʼs lost decade, the presence of“zombie firms”has been regarded as the main culprit of prolonged stagnation in the sense that it has discouraged the smooth reallocation of productive resources among industries. However, even though most of the zombie firms eventually recovered through downsizing in the first half of the 2000s, the deflationary economy has persisted. Interestingly, even reputable firms, which can be a leading force of innovation, have on the whole remained inactive in terms of investment in growth opportunities.

We investigate why capital investment by reputable Japanese firms remains sluggish even though they generally retain sufficient cash reserves or debt capacity to actively invest. Moreover, we hypothesize that such conservative financial and investment policies are driven by three motivations: managerial entrenchment, precautionary saving, and inefficient internal capital market. Our GMM estimation of the q-type investment equation incorporating variables related to these three motivations and considering the possibility of structural changes in firm behavior before and after the global financial crisis suggests the following: before the crisis ( 2004-8 ), a pseudofinancial constraint phenomenon, by which we mean the prioritization of zeroleveraged status over capital investment, prevailed because of managerial entrenchment and precautionary saving. After the crisis ( 2009-13 ), the pseudo-financial constraint phenomenon generally weakened; however, the experience of sudden downturn and temporary liquidity shortage caused by the crisis reinforced the motivation for precautionary saving and reduced capital investment by manufacturing industries.

JEL Codes:D22, G31, G32, G34
Keywords:Zero-leverage, Managerial entrenchment, Precautionary saving

Uninsured Risk, Stagnation and Fiscal Policy

R. Anton BRAUN, Tomoyuki NAKAJIMA

Japan is in the midst of a protracted spell of depressed economic activity. Japanʼs economic stagnation has occurred against a background of rising earnings risk. Occupational stability is falling as routine occupations disappear and implicit lifetime employment guarantees are gradually disappearing. At the same time earnings in some high-skilled occupations have continued to grow. The resulting polarization in earnings has also been accompanied by an increase in wealth inequality. We develop a framework that relates these observations. In our model, an increase in uninsured earnings risk depresses output and increases wealth inequality. We then analyze the efficacy of alternative fiscal measures in terms of their ability to increase economic activity, reduce wealth inequality, and improve welfare. We find that a lower tax rate on capital achieves all of these objectives.

JEL Codes:E13, E16, D31
Keywords:Economic Stagnation, Wage Polarization, Wealth Inequality

Macroeconomic Implications of Low Japanese Government Bond Yields

Masaya SAKURAGAWA, Yukie SAKURAGAWA

One major puzzle of the Japanese economy atpresentis thatlow governmentbond yields coincide with a high level of government debt. This paper investigates the general equilibrium mechanism underlying this relationship and examines its macroeconomic implications. We argue that when investors fail to achieve international risk diversification in their asset portfolios because of home bias, they have no assets to hedge fiscal risk. The bond yield is then less sensitive to default risk, and the government can sustain a high level of debt. However, such sustainability is only possible at the expense of a reduction in the real interest rate, which weakens policy effects and ultimately leads to secular stagnation.

JEL Codes:E00, G12, H63
Keywords:Fiscal risk, Safe assets, Risk premium, Sustainability, Real interest rates

Global Funds Glut, World Interest Rates and Secular Stagnation

Yoichi MATSUBAYASI

This paper examines the role of the natural rate of interest in the global economy and views secular stagnation within a global context. First, we clarify the concept of a global natural rate of interest, which we then calculate using three methods. All three series are found to have gradually declined since the 1990s. Second, we employ a panel VAR to examine the determinants of the global natural rate of interest. The empirical findings implicate reduced global investment to be the main factor underlying the decline in world interest rates, which, in turn, might be the cause of worldwide secular stagnation and deflationary pressures.

JEL Codes:E21, E22, F41
Keywords:Secular stagnation, Global funds glut, Global natural rate of interest, Panel VAR

The Effects of Quantitative Easing on Bank Lending: The Case of Japan

Minoru TACHIBANA, Hitoshi INOUE, and Yuzo HONDA

The purpose of this paper is to analyze the effects of Quantitative Easing (QE) on bank lending in Japan, using panel data on banksʼ financial statements. The results indicate that QE in the first half of the 2000s has a statistically significant effect on bank lending. In particular, the effect is highly and robustly significant in FY 2002, for member banks of the Second Association of Regional Banks, and for banks with a high non-performing loan ratio. Meanwhile, the effects of “ Comprehensive Monetary Easing ” introduced in 2010 and “ Quantitative and Qualitative Monetary Easing ” introduced in 2013 on bank lending appear less robust, though some results are statistically significant. These results imply that “ bank lending channel ” detected under conventional monetary policy can be also seen under QE. Finally, we discuss

three transmission mechanisms other than bank lending channel, i. e. portfolio rebalancing channel, aggregate demand channel, and balance sheet channel, through which QE might have effects on bank lending.

JEL Codes:E51, E52, G21
Keywords:Quantitative Easing, Bank lending, Bank lending channel

Dynamics of Expected Inflation in Japan

Tatsuyoshi OKIMOTO

Over the last three decades Japanese economy has experienced many significant events, such as a burst of bubble economy, lost two decades, Lehman and Euro financial crises, and introduction of zero interest rate and inflation targeting monetary policies. It is quite important to examine how expected inflation rates in Japan have evolved through these events. In this paper, we analyze the dynamics of expected inflation rates based on the smooth transition Phillips curve model. We find that there is a strong connection between the expected inflation and monetary policy regimes. In addition, the results indicate that the introduction of inflation targeting policy and quantitative and qualitative monetary easing in the beginning of 2013 have successfully escaped from deflationary regime, but might not be enough to achieve 2% inflation target. Meanwhile, Bank of Japan has introduced Quantitative and Qualitative Monetary Easing(QQE)with a Negative Interest Rate since early 2016. It is desirable to analyze further on the impact of newly introduced policies once data is available.

JEL Codes:C22, E31, E52
Keywords:Hybrid Phillips curve, Inflation target, Smooth transition model

Japanese Monetary Policies and Spillovers to Asia: A Global VAR Approach

Robert DEKLE

I examine the impact of Japanese expansionary monetary policies on its Asian neighbors through the lens of the global vector autoregression model. In the short-run, I find that more stimulative Japanese monetary policies─as measured by an increase in Japanese base money─negatively impacts on the GDPs of Korea, China, and Thailand. In the medium-and longer-runs, the expansion of Japanese base money has a positive effect on the GDP of Thailand, no effect on China, and a somewhat negative effect on the GDP of Korea.

JEL Codes: F36, F32, F35
Keywords: International Spillovers, Unconventional Manetary Policies

  • 1-6-1 Nagata-cho, Chiyoda-ku, Tokyo 100-8914, Japan.
    Tel: +81-3-5253-2111