ESRI International Conference "The Changes of the Japanese Economy During the So-Called Lost Decade and the Recovery Out of It "

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ESRI International Conference

Change and Recovery of the Japanese Economy during the "Lost Decade"

As of March 28, 2007

Session 1: < Monetary Policy and Financial Markets >
1. Author's Presentation

Tsuyoshi Mihira: "Was the Policy of Quantitative Easing Effective?"

The quantitative easing policy (QEP), introduced by the Bank of Japan (BOJ) in March 2001, was a new monetary policy framework implemented until March 2006. It aimed to:

           1.change the operational target of Japan's monetary policy to quantitative measurement (BOJ current account balance);
           2. continue the policy until inflation rates became stably positive; and
           3. smoothly supply BOJ current account balance by increasing JGB purchases.

During the period of QEP, actual call rates were almost zero. Policy operational targets were indicated by means of quantitative measurement of BOJ current account balance instead of call rate.
BOJ current account balance, the policy's quantitative target, was ¥5 trillion at the beginning and ¥30-35 trillion at the end of QEP.
According to our analysis of QEP's macroeconomic effect using macroeconomic and structural VAR models, it had a positive impact on economic recovery.
On the analysis of the transmission mechanisms of the QEP, on the other hand, we found no clear evidence that the QEP had any unique effect through the policy's expectation effect, time-lag effect, signaling effect or portfolio rebalancing effect. Macroeconomic effects have been recognized, but the transmission mechanisms have not been clearly identified.
(Paper: Was Quantitative Easing Policy Effective? An Empirical Analysis of the Monetary Policy in Japan during 2001-2006
[ 1 (PDF-Format 391KB) ] [ 2 (PDF-Format 353KB) ] [ 3 (PDF-Format 324KB) ])

2. Comments from Panelists

Ken West (on Mr. Mihira's report)

Japan is currently putting its liquidity crisis behind it and I am looking closely at whether QEP played a fundamental role.
The important point is that, while past papers focused on the announcement effect rather than on QEP, with this paper we can look back over the entire QEP period. The paper carefully analyzes mechanisms, etc. of various ripple effects.
Past and present papers are consistent in that BOJ's current account balance grew sharply because of quantitative easing. This paper explains the policy more clearly from a viewpoint different from the zero interest rate policy, and gives new perspectives on the QEP's substantive effects on output.
In the calculations of impacts on the output gap I would want to see further calculations for 2001-2005, analyzing what would have happened had QEP not been implemented.
In the structural VAR model and two macroeconomic variables, statistical superiority differences need to be replaced by economic magnitudes.
A gap is seen between the macroeconomic bases and bases of transmission mechanisms, but transmission mechanisms are superior. As there seem to be fundamental causes between 2001 and 2005, separating around 2001 would be preferable.
Curves of monetary demand residual and total demand should not be together.
The transmission mechanism is consistent in past papers, but channels are not so clear. I would expect more detailed analysis of substantive effects of QEP on macroeconomic results.
(Explanatory material: I.Summary II.Comments (PDF-Format 19KB))

3. Q&A Session

(Speaker)

The graph on page 24 shows implied forward rates, but it is difficult to identify effects of QEP. Well-founded continuous variables are needed when using dummy variables.

(Speaker)

It shows that the current account balance was not low, but it is useful to look at the monetary base to see what is happening regarding money supply.
It doesn't show destinations of excess money. It should provide projections because the current account balance dropped sharply.

(Speaker)

Conflicting effects are noticeable in forward rates. They were bound at low levels during the commitment period, but an effective policy would bring about appropriate inflation rates, bringing forward rates higher. I expect it will be so in 8-9 years time, but the paper doesn't mention this.
Regarding long-term inflationary expectations, does Japan have such data? If so, does the data show any measures to raise inflationary expectations further in 5 or 10 years ahead?

(Speaker)

Past monetary policies, change in current account balance and change in targets show a sharp increase in the current account balance since April 2003.
Zero interest rate policy and QEP had two objectives: (1) prevent uncontrolled deflation in the Japanese economy which had yet to find the bottom, and (2) dispose of non-performing loans (NPL).
Effects of QEP are noticeable in stock markets and foreign exchange. As to rebalancing, household savings particularly flowed from bank savings to equities.

(Speaker)

In order to look at the transmission mechanism regarding QEP in the past decade, very clear analysis of the banking system is needed. Further analysis is necessary as money supply doesn't necessarily respond directly to quantitative easing.
The biggest reason for the very long deflation or the prolonged "lost decade" is malfunctioning of the financial system.

Mihira

Thank you for the useful comments and important suggestions for continuing this research project.
To look at macroeconomic impact on the output gap in terms of the difference between the cases where quantitative easing was implemented or not, rather than by means of long-term coefficients, I would like to run a simulation setting excess money to be zero. I will use dummy variables in the macroeconomic model as well.
I would also use orthodox measurement of monetary quantity such as base money in the macroeconomic analysis, because consistency would not be achieved if a peculiar variable ('excess money') was used in the macroeconomic analysis and different variables were used in the analysis of transmission mechanisms (in which we cannot obtain appropriate data for excess money). I believe the use of the peculiar variable of excess money affected the results of macroeconomic analysis.
In the analysis of forward rates, future inflation expectation is taken into consideration as the underlying structural model contains future inflation rate, but it is not included explicitly in the estimation formula. We would examine the estimation with an explicit variable of expected inflation, if we could construct such a variable using survey data, etc.
I haven't obtained clear results as to the QEP's rebalancing effect on equity prices, nor as to where in demand the quantitative easing was effective.

(Speaker)

We could conclude the transmission mechanism is not so clear. When analyzing, it is difficult to quantify as it is not a traditional econometric variable. It is difficult to choose specific dummy variables.

4. Author's Presentation

Yasushi Okada: "Why Is the Persistence of Japan's Low Rate of Deflation a Problem?

Deflation is very simple and has no specific assumptions or mechanisms. The liquidity trap is a common phenomenon, not specific to Japan; it inevitably occurs when a central bank lowers the long-term target inflation rate (from an already low inflation rate).
As to why mild deflation persists, while US and Japanese deflation rates during the Great Depression in the 1930s were 10-20%, deflation rates are currently only 1-2%. These low rates caused prolonged economic stagnation. Looking at labor productivity and real wages, deflation of 1-2% was sufficient to raise the real wage rate, which weighed on corporate earnings. This caused weak recovery until 2002.
A lower real wage rate improves corporate earnings but weakens domestic consumption demand, and can cause prolonged recession. Here we need support from external demand. If the government/BOJ clearly announced they would end deflation and normalize the economy,that could trigger export-driven recovery. However, the economy is in a very vulnerable condition and the long-term adjustment process has not been completed.
Looking at average labor productivity, I don't think large changes are happening on the production side. The creation of a huge gap between the real wage rate and labor productivity enabled Japanese corporations to recover their earnings base, but I am not sure if that was really a solid recovery.
(Paper: Is the Persistence of Japan's Low Rate of Deflation a Problem? [ 1 (PDF-Format 53KB) ] [ 2 (PDF-Format 93KB) ])

5. Comments from Panelists

Anil Kashyap (on Mr. Okada's report)

Although Mr. Okada didn't emphasize it, there are constant real spending levels, money supply growth and constant production, which lead to constant real variables. Even balanced money supply must be constant, which suppresses inflationary trends.
During the 1990s and the first few years after 2000, every recession received strong monetary stimulus, but why did deflation continue? Why did recession continue despite the easing of fiscal/monetary policies? There are several arguments about zombie companies, i.e. that efforts to sustain insolvent companies and keep their market share distort competitive structure, etc.
Two important points that must be understood are fiscal/monetary policy stance and "when will recession occur?" The two trends do not match without a great deal of imputation and we need to apply additional mechanisms to understand them.
The Japanese economy has not completely put crisis behind it, but it should be operating normally. As the banks' nominal interest rate is 1.5%, even though the economy has emerged from the longest period of expansion in history, banks will have a big problem in the future.
Looking back over the past 15 years, perhaps because Japan is used to low inflation, some argue BOJ should set low inflation targets, but they are wrong. It is not wise to keep low inflation targets.
Looking ahead, we need more structural reform. We have not concluded that Japan has returned to normal conditions. We cannot be confident that everything has become normal unless the banking sector operates normally.
(Explanatory material: "Comments on "Is the Persistence of Japan's Low Rate of Deflation a Problem?" (PDF-Format 47KB))

6. Q&A Session

(Speaker)

Real wage problems will cause earnings crises which will affect investment, indicating a grim future. Is the absence of new investment affecting everything?

Kashyap

People would limit their investment if resources were fed in wrong directions such as zombie companies.

(Speaker)

Regarding zombies, how do you get away from 1.5%? Perhaps you must change policy interest rates.

Kashyap

If expected inflation goes up, the policy rate will change accordingly and banks will drive indirect financing in a more normal way. The question is has Japan put deflation behind it? Why doesn't long-term expected inflation rise further?
As to export-driven growth, there are still potential production growth opportunities, but domestic demand and the service sector must increase for sustained growth.

(Speaker)

Current economic rates are recovering thanks to domestic demand triggered by corporate investment and capital investment.

(Speaker)

(To Prof. Kashyap) In the past, Japan suffered a period of financial crisis. The injection of public funds by the government into banks during 1997-98 was the most serious problem in last 10 years. I think it was natural that this had a negative impact and recovery was sustainable for only a few years.

(Speaker)

Stimulus from exports was crucial for economic recovery. A strong Chinese economy may have caused it. Analysis of the role of policy and foreign affairs in the recovery is needed.
If much restructuring was conducted in Japan, why haven't data improved in terms of productivity?

(Speaker)

Most zombie companies have died out. Listed companies' break-even points are at low levels. Compared with the figures seen prior to the bubble era, corporations are getting healthier and restructuring may possibly be in progress. Furthermore, most mega-banks have paid back public funds injected into them.
Although the argument goes that economic recovery is real in terms of capital expenditure and exports, the ratio of capital expenditure plus exports to GDP grew, but the ratio of consumption to GDP fell from 2002, creating a large gap. Also, less corporate earnings have flowed into households than BOJ expected.

Okada

An unstable financial system is a cause of deflation as it increases cash demand.
Deflation was clear in late 1995 when the near-zero interest rate policy was introduced. Although credibility of long-term monetary policy is important, movement in near-term monetary policy is also a very important element. The BOJ's lack of consistency and reactive monetary policy are meaningless.
Rigidity of Japan's wage rate is not great if viewed in a 5-6 year period because the prolonged recession was not caused by high nominal wages but by low nominal corporate earnings. The real cause of the decade-long recession in the 1990s was the abnormally high labor distribution rate caused by higher real wages under deflation.

Session 2: < Macroeconomic Policy Mix >
1. Author's Presentation

John Taylor: "Lesson from the Recovery from the "Lost Decade" in Japan: The Case of the Great Intervention and Money Injection"

In today's panel we argued strong overseas growth causing economic recovery, structural changes under way, public funds injection, zero interest rate policy and expectation effect caused by it. However, it takes time for real causes to be identified. In addition, the monetary base is currently shrinking rapidly.
One of the points is overall exchange rate movements. In the 1970s and 1980s, the yen appreciated and growth was strong, but after the late 1980s the yen did not fluctuate and constancy in yen/dollar rates was seen during the "lost decade". As strong economic recovery was seen under yen/dollar rates with little change, exchange rate cannot be considered a major cause.
In summer 2000, interest rates were zero and focus was on how BOJ would end its zero interest rate policy. I argued the need for increasing money supply and that BOJ should keep rates under zero until GDP growth or inflation occurred, but BOJ entered positive interest rate levels.
Second, what is important in policymaking is the need for considering growth in money supply, including zero interest rate policy, not whether to adopt a zero interest rate policy, because movements in data may swing monetary policy.
From 2003 through early 2004, the "great intervention" of US$340bn, unseen before, was conducted. It was important in the context of increasing the monetary base and it may have had other positive impacts, but its impact on foreign exchange rates is not very clear.
The intervention abruptly ended in March 2004, accompanied by big final movements. This weakened the yen instead of the dollar, and BOJ's large-scale purchasing drove exchange rates in the wrong direction, which triggered foreign exchange diplomacy and the intervention receded.
The "great intervention" was very abnormal and large and was conducted in a very timely fashion in relation to money supply. We must study further the FX-related operations for preventing stronger yen to support the recovery and to what degree funds were injected.
(Paper: "Lesson from the Recovery from the "Lost Decade" in Japan: The Case of the Great Intervention and Money Injection
[ 1 (PDF-Format 63KB) ] [ 2 (PDF-Format 50KB) ]

2. Comments from Panelists

Tsutomu Watanabe (on Prof. Taylor's report)

The QEP was implemented between 2001 and March 2006. The huge supply of money was key to the economic recovery and the massive intervention was an important element. In his paper Professor Taylor argues that what was important is that the two policies were not implemented separately but were closely related to each other, and that the intervention was not sterilized. My comments aim to determine whether there was a specific, clear relationship between the huge money supply and large intervention during the period.
US and Japanese interventions are very different; while the US doesn't intervene significantly, Japan intervenes very frequently, particularly during 1999-2004. In this period it intervened massively with a total of over ¥50 trillion.
Next, looking at the time when the massive interventions were conducted, a positive intervention meant BOJ buying US dollars and selling yen. It started at the end of 2002 and ended March 2004, after which it hasn't intervened at all. This means it was a very special period.
During the period of massive interventions, the current account balance grew from ¥15 trillion to ¥35 trillion. The growth of the current account balance exactly overlapping the period of massive intervention is very important. Although a very weak correlation is noticeable between BOJ's current account balance and interventions, surprisingly, a positive one-to-one relationship is noticeable between the two on the days when massive intervention was conducted.
Research shows this foreign currency intervention was not sterilized because massive interventions were related to massive money supply. Non-sterilized intervention was conducted only after summer of 2003 when the Japanese economy already showed recovery. This evidence does not match Professor Taylor's report. It is important to examine the Japanese experience.
(Explanatory material: "Comments on "Lessons from the Recover from the Lost Decade in Japan: The Case of the Great Intervention and Money Injection" by John Taylor" (PDF-Format 106KB))

3. Q&A Session

(Speaker)

Your argument is that exchange rates were not the cause. Do you see a different picture when looking at the impact of FX rates on Japan's economy by using not only the dollar but also other currencies, and is it meaningful?

Taylor

It won't signify greatly as it won't change using trade-weighted calculations. I used the dollar, the universal currency.

(Speaker)

Which channel are you thinking of when you emphasize increased monetary base? I think a clear channel is expectation of future interest rates.
You emphasize the difference between sterilized and non-sterilized interventions but they are not particularly related to this case because interest rates were already zero.

(Speaker)

Regarding effects of interventions, some argue that, under the Japanese system, interventions are automatically sterilized because intervention funds are financed by issuing government securities. What do you think of this?
Under QEP, the amount of monetary base is considered to be determined by the target of BOJ current account balance. If interventions were effective, they were so only when accompanied by the raising of this target. In this regard, do you believe there was coordination between the Finance Ministry and BOJ in that sense?

(Speaker)

Through what channel were currency interventions effective? Did real exports grow (accelerate) markedly in 2003-2004 by this lag?

(Speaker)

The period of massive interventions was the period when an unconventional form of monetary supply was needed. The financial system didn't function well, bank lending didn't grow much, or rather shrank at that time.

Taylor

Thank you for the many comments. I analyzed from the point of how money supply impacts on the economy using a very traditional way of thinking as I do not have access to information.
What is important is that Japan has not intervened in the FX market since March 17, 2004, which means the massive interventions were special. Other G7 countries did not intervene anywhere. I wouldn't exclude interventions totally, but they should not be used unless markets collapse greatly.
Professor Watanabe's chart is an amazing scatter diagram which shows a direct correlation during the intervention period. It was a very complex phenomenon. I asked many people about the relationship to sterilization but their answers differed, and I don't think many are not already reflected in real policies.
The system works so it is sterilized automatically on a daily basis. However, determining current account balance targets, for example, are not endogenous; there are various external factors. One party moves and the other reacts - it's basically communication between BOJ and the Finance Ministry.
In the chart I explained interventions occurred particularly in specific places, but intervention policy was not only on the FX levels. The biggest problem here is channels of monetary base.
We should also consider that slowing money growth in a series of long-term economic moves was related to the "lost decade". It is true that the money growth theory in economies has not been fully understood, but bank channels are also very important.
Monetary target and current account balance are not necessarily exogenous; they pressure government operations in various ways.
FX rates during the period were very stable. Sharp currency appreciation in the early stages of recovery is a big concern and it is important to implement strategies to avoid it.

Session 3: < Structural Change in Labor Market >
1. Author's Presentation

Jiro Nakamura: "Impact of Foreign Workers on the Japanese Labor Market: From the Experience in the 1990s"

There are about 700,000 foreign workers in Japan, accounting for 1% of the labor force. The only data on foreign workers in Japan are Health, Labour and Welfare Ministry-approved statistics, which show the number of foreigners employed by businesses for the past 10 years. Foreign worker issues need to be tackled by policy. Analytical methods and data gathering to prepare for the future growth in foreign workers are important.
I analyzed the acceptance of foreign workers from three aspects: (1) impact on Japanese workers' wages, (2) impact on labor shift among Japanese workers, and (3) difference in employment and wages of Japanese workers between businesses with and without foreign employees. I compiled foreign worker data using official statistics, but it was difficult to estimate/understand the relationship between foreign and Japanese workers.
It is generally thought that domestic workers' wages fall with employment of foreign unskilled workers, which increases labor supply under certain conditions, but analyses of US immigrants, etc. show that isn't the case. Outflows of domestic workers can be considered as a factor behind this. Businesses employing foreign workers pay higher starting wages and have more employees with higher education.
Our analysis shows workers with lower education/skills could be affected by the employment of foreign workers. Outflows are also observed. Meanwhile, from the demand side, demand for foreign workers is stronger for those with lower education/skills. Comparing the first and second halves of the 1990s, the revision of the immigration law in 1991 resulted in a rapid increase in foreign workers in the first half, but they trended around 700,000 in the second half, showing difference in its effect.

2. Comments from Panelists

Jennifer Corbett (on Prof. Nakamura's report)

I expected the employment of foreign workers would affect the Japanese labor market because greater labor supply lowers wages, but it doesn't appear so. Lower wages may be masked by other effects, and prediction is difficult.
Although foreign workers have increased, with 700,000 accepted in the past 10 years, they still account for a small portion in Japan's entire labor force. The UN reported the employment of foreign workers would solve the problems of an ageing society, but 600,000 extra workers annually could sustain the Japanese labor force and they have yet to impact greatly on Japan's labor market.
You argue employment of foreigners in a certain area prompts outflow of Japanese workers with lower education, but is it possible in reality? Can wages fall with greater foreign labor supply? It is very difficult to reach a conclusion. Perhaps we may have to return to the fundamental question of whether inflow and wages are really important actions.
The content of the paper should be highly evaluated but we need further analysis in many areas. Employment of foreigners is a very sensitive issue in Japan, and policy cannot be implemented without recognizing its effects. We need to gather many data regarding foreign workers. We also need to analyze not only impacts on wages and labor conditions, but also policy selection, effects on benefits, welfare and consumption.
(Explanatory material: Comments On "International Migration and Labour Markets" (PDF-Format 75KB))

3. Q&A Session

(Speaker)

Unlike the US etc., Japan has very few foreign workers. With low ratios to the entire labor force, they may not impact greatly on wages.
Korean residents are officially foreigners, but should they be included in foreign worker statistics as they stay in Japan over generations?

(Speaker)

Japan has very few immigrants. Some argue Japan should actively accept immigrants in light of slower population growth, but in Japan's labor market there is no information providing answers to such problems, unlike countries with a history of immigration. Will wage differences really occur with few foreign workers?

(Speaker)

Japan should look at study results in other countries like the US, which has conducted immigrant studies.

(Speaker)

Are foreigners' children born in Japan statistically classified as foreigners? They are not immigrants and need to be looked at using different measures.

(Speaker)

Determining the objective of the analysis is important. Even if Japan opened up for immigration and solved population problems, that would be political analysis. Even the short-term negative impact on wages following the acceptance is not relevant to lower wages and is not reasonable.

Nakamura

The term "foreign workers" is very problematic in Japan. Korean residents are almost the same as Japanese. Also, some foreign workers have high skills/qualifications and others don't and we should be very careful in this respect. However, finer classification would lead to smaller numbers covered by each category, causing doubt as to accuracy of statistics.
It is important to consider flow-related issues, not stock-related ones. Since the mid 1990s, foreigners have increased in some areas and not in others, and trends differ between the two.
In a macroeconomic context, we should naturally make international comparisons and check types of effects depending on types of inflows/outflows of foreigners.

4. Author's Presentation

Henry Farber:"Long-Term Employment in the United States and Japan"

Amid globalization, low wage competition with Asian and Latin American countries affects both US and Japanese economies, which is affecting labor markets. Both are high-wage countries and need to make labor adjustments to adapt the labor force to changing demand, but they are different in corporate structure, labor market structure and social customs.
In the past 30 years, the labor force has increased in the US and the employment rate is higher than in Japan. This is related to population growth rate. The US population has increased steadily due partly to immigration, while Japan has experienced accelerated decline and an ageing population.
As seen in lay-offs, labor security in US corporations is low while many Japanese corporations provide very strong labor security. With a rigid labor market with low turnover, Japanese companies reassign or transfer employees to other companies rather than laying them off. Recently, permanent staff numbers have decreased and non-permanent numbers have increased, diversifying the labor force.
The percentage of part-time workers in the entire workforce has increased in Japan but is static in the US. Female part-timers have also increased. In both countries, the percentage of good permanent jobs has decreased sharply.
US and Japan's labor market is beginning to change from past systems. Japan is maintaining the core mechanism, but workers covered by it are decreasing, while in the US companies sever workers as required. As a result, in both countries employment stability has declined in the labor market and regular, long-term employment relationships have declined. Japan maintains a lifetime employment system, but companies have started hiring more part-timers and other non-permanent staff.
(Paper: "Labor Market Adjustment to Globalization: Long-Term Employment in the United States and Japan"
[ 1 (PDF-Format 227KB) ] [ 2 (PDF-Format 98KB) ])

5. Comments from Panelists

Yuko Ueno (On Mr. Farber's report)

Japan's labor market is characterized by younger age of entering long-term employment than in US, mandatory retirement age, shift of female workers to non-permanent labor, growing job changes, etc.
In recent long-term employment, while average service years of male permanent workers have generally increased since early 1990s, they have decreased for younger workers and are static for part-timers. This is caused by corporations opting for long-term employment; Japanese corporations' uniqueness such as their requirements for and maintenance of skills, transaction cost with labor unions, temporary assignment/transfer system, and seniority-based pay scale for workers make job hopping unfavorable. Furthermore, emphasis on loyalty to company can be considered.
Competition and pressure from globalization, etc. may change Japan's long-term employment system. There are also trends, although yet to be pronounced in Japanese corporations, of increasing non-permanent employees amid use of ICT and their substitution for permanent employees. Furthermore, the percentage of workers in the service sector (with higher turnover than manufacturers) is increasing amid changing the industrial structure.
These days, Japanese young people tend to look for jobs actively. As there are more people with higher education, many change jobs to change their career until they can choose lifetime employment sometime in the future. In 10 years the percentage of permanent employees has decreased among new graduates, from over 80% to 64%, particularly among high school graduates.
Recently, although corporations are resorting to severance more often to adjust workforce numbers (as potential for transfer of employees who would otherwise be severed nears its limit), they want to keep lifetime employment to some extent.
Lifetime employment is intact, but short-term employment is increasing among both female part-timers and young people with lower education. With presence of severance as employment adjustment, many workers, particularly new graduates, get stable jobs to become long-term employees.
(Explanatory material: Comments on "Labor Market Adjustment to Globalization: Long-Term Employment in the United States and Japan"
(PDF-Format 108KB))

6. Q&A Session

(Speaker)

Younger generations will pay the price for the past decade. I would like to know about the government's efforts to handle generational changes and adjust inequality between generations.

(Speaker)

We could look at the increase in part-timers in two ways: either employment deterioration or improved labor market flexibility. Lifetime employment has changed and options have increased in light of Japan's characteristics.

(Speaker)

We should focus on the pool of those over 60 years old to deal with the long-term population trend. With longer life expectancy, the current mandatory retirement system (at age 60) needs to be reconsidered by discontinuing the system and raising the retirement age. This could contribute to social security benefits, increased tax revenue with longer working years, labor supply, turnover of labor market, and could deal with job change issues.

(Speaker)

Will employment stability and labor period diversify in relation to progress in globalization of the labor market?

(Speaker)

As the pre-war Japanese labor market was characterized by high turnover, it is difficult to consider lifetime employment as a traditional cultural phenomenon. The Labor Standards Law brought about changes. As I understand the Law, which requires efforts to avoid severance, creates some of the the greatest restrictions on severance in the OECD.

Farber

Whether part-time labor is good or bad depends on the situation. In the US mothers with small children prefer part-time jobs and part-time labor will be maintained, but there is a large wage gap between permanent workers and part-timers. The gap is bigger in Japan, which seems to be adjusting labor by adopting part-time labor in its economy faced with international competition and friction.
Lower labor stability and shorter service periods are caused by globalization and uncertainties over labor demand. Amid growing uncertainties, both risk and cost increase further and corporations become reluctant to hire permanent workers they cannot sever easily. This trend will intensify further.
Your points regarding Japan's lifetime employment system are very interesting. Lifetime employment is one of the special characteristics of the economy and I believe it will disappear if such economic conditions disappear. I do not know much about Japan's Labor Standards Law.

Ueno

As to the response of Japanese corporations to globalization, data show that corporations with greater overseas production in the 1990s were faster in adjusting employment. Japanese corporations are gradually shifting from long-term employment as globalization progresses. Numbers of part-timers are increasing in the overall labor market. Corporations may be hiring part-timers when adjusting employment.
I don't know much about the Labor Standards Law. Severance lawsuits filed by workers were almost nonexistent in the past, but we have seen such lawsuits since late 1990s. The high-cost situation for corporations seems unchanged.

(Speaker)

Population decrease and an ageing workforce are huge issues for Japanese industries. The Cabinet Office is discussing labor from both demand and supply sides. The supply side looks at using senior citizens to eliminate labor insufficiency, increasing female workers' participation, and inflow of foreign workers. The demand side also must look at them.
The mindset gap between young and older people is a large policy problem. Young people at first do not want lifetime employment, change jobs in 10 years, and then tend to want long-term employment if possible. In senior workers, those whose retirement age was raised to 65 are also active and want to get their retirement age raised further or continue working at other companies. This gap relates to the pension system and medical issues. There is inequality in benefits between generations.
Immigration issues need much debate. Simply taking workers from outside won't solve labor problems. Many countries accepting immigrants have related problems.

Panel Discussion: < Recent Developments of the Japanese Economy >
1. Author's Presentation

Katsuhiko Masubuchi: Recent Developments of the Japanese Economy Seen from the National Accounts

As to changes in Japan's economy, I will discuss the household savings rate based on the recently revised national economic accounting data. Japan was known for its high savings rate, but the situation has changed; in FY2004 it was 2.7%, the same level as in the US and lower than European countries. Revised employee compensation since 2000 has had a great impact, but the impacts of an ageing population and population trends are also considered. Imputation plays an important role as well.
Looking at these changes quantitatively, factor analysis of changes from 1999 through 2004 estimates a 1.9% decrease in the contribution of imputation and a 3.7% decrease in ageing in 2004. The contribution of other elements is relatively small at 0.9%. These three factors can explain most of the recent decline in the household savings rate.
Change in the household savings rate has complex factors, including the raised age of eligibility for receiving public pension benefits and temporary decline in retirement benefits. Greater disposable income following economic recovery and growing savings rate in young people will mitigate the rapid decline to some extent, but a long-term downward trend will be unavoidable with an ageing population.
(Paper: "Recent Developments of the Japanese Economy Seen from the National Accounts"
[ 1 (PDF-Format 434KB) ] [ 2 (PDF-Format 168KB) ] [ 3 (PDF-Format 134KB) ])

2. Author's Presentation

Masaaki Maruyama: Recent Developments of the Japanese Economy Seen from the National Accounts

I will discuss trends in Japan's fiscal balance after the 1990s by using figures excluding special factors. Government fiscal balance in FY1990 was a positive ¥11.9 trillion (2.6% of GDP) but it deteriorated rapidly after the bubble burst. The fiscal deficit kept growing to a total of ¥35.7 trillion (7.2% of GDP) in FY1999 and ¥41.2 trillion (8.3% of GD) in FY2003. It decreased to ¥33.8 trillion (6.8% of GDP) in FY2004, but still stays at high levels.
Fiscal balance deteriorated ¥47.3 trillion from FY1990 through FY1999, due mainly to the widening gap between social security payments and burdens in an ageing society (¥12.1 trillion), lower tax revenue (¥11.4 trillion), increased government final consumption expenditure (GFCE) (excl. social benefits and depletion) (¥10.3 trillion), and increased government fixed capital formation (GFCF) and net land purchase (¥6.5 trillion). Post-bubble domestic demand stimulating measures increased GFCF.
Meanwhile, fiscal balance improved ¥7.4 trillion from FY2003 through FY2004, due mainly to three factors; decrease in GFCF and net land purchase by fiscal reforms (¥3.6 trillion), decrease in GFCE (¥800bn), and increased tax revenue (¥3.3 trillion). Increased tax revenue was due mainly to income and consumption tax as well as from corporations, reflecting economic recovery with growing corporate earnings.
(Paper: "Recent Developments of the Japanese Economy Seen from the National Accounts"
[ 1 (PDF-Format 434KB) ] [ 2 (PDF-Format 168KB) ] [ 3 (PDF-Format 134KB) ])

3. Author's Presentation

Jun Saito: Economic Policies in Japan since 2001: Stocktaking of Lessons and Outstanding Issues

Japan's economic policies after 2001 were intended to emerge out of the long post-bubble recession and achieve robust economic growth through economic structural reforms. However, they were an unprecedented policy package, triggering many controversies. Policy implementation and economic conditions for the past five years provide opportunity to review these contoversies, draw lessons, and identify outstanding issues for future research. We draw the following tentative conclusions in this paper:
Long-term stagnation and deflation were caused by both supply- and demand-side factors. Structural reforms, particularly prudential policy for NPL disposal, played a great role in overcoming them.
Prudential policy brought about a regime change and provided strong incentives to banks to dispose NPLs. Efforts to reconstruct the troubled firms contributed in minimizing the cost of NPL disposal.
The new monetary policy framework was effective in supporting recovery from long economic stagnation and deflation. In particular, the zero interest rate policy was effective in maintaining low interest rates. QEP supplied sufficient liquidity to stabilize the financial system.
Fiscal situation could be better judged by gross government long-term debt. Primary balance has improved but further efforts are needed to recover fiscal sustainability.
Finally, outstanding issues for future research are identified.
(Paper: "Economic Policies in Japan since 2001: Stocktaking of Lessons and Outstanding Issues"
[ 1 (PDF-Format 285KB) ] [ 2 (PDF-Format 89KB) ])

4. Author's Presentation

Matt Slaughter: The Japanese Recovery: How Will It Affect the Global Economy?

What impact Japanese economic trends will have on the global economy is an important issue. Japan's GDP growth last year was higher than the past 10-year average. Domestic demand has accelerated, but its levels are still lower than other developed countries. What is notable is the slowdown in Japan's productivity for 15 consecutive years, contrasting with US productivity accelerating in the past 10 years. This is due to regulation still remaining in Japan's capital, labor and products markets.
Japan has a current account surplus in the global economy and trade imbalances. It has long had a trade surplus, which contrasts with the US's large deficit. Japan boasts a current surplus and attention is focused on what will happen with its trade and current account surpluses if Japanese economic recovery continues.
Japan's household savings rates are decreasing dramatically. They are declining also in the US, reflecting population trend change and slow growth in household income. The issue is whether lower household savings will impact on the decline in Japan's current account surplus.
In the country's overall savings rate, government savings are negative due to the corporate sector. Like the US, corporate savings have become stronger recently but decreased in the country's overall savings.
Regarding overseas FDI, growth in Japan's FDI in the US doubled in relative terms to GDP from 1995 to 2004 and its stock is the second highest after the U.K. As to whether Japanese corporations conducted FDI as a substitute for domestic investment, some argue that increased corporate overseas investment leads to decreased domestic investment, but we haven't got an answer. Other countries have microeconomic evidence of inward FDI as a factor supporting productivity growth.
Current Japanese economic recovery is very promising. Although Japan's external position isn't clear, its impact on global imbalances will change.
(Paper: "The Japanese Recovery: How Will It Affect the Global Economy?" (PDF-Format 53KB))

5. Author's Presentation

David Weinstein: Defining Price Stability in Japan

CPI is a very important figure in Japanese policy. When lifting QEP, BOJ released a statement that there was no bias in Japan's CPI, but there is great concern that there may be monetary or policy bias.
Differences between Japanese CPI and US CPI - US CPI has two tiers; the higher one includes 211 levels containing price indices from 38 districts, on which Laspeyres index formula or Tornqvist index formula is used. Most CPI revisions are made at the lower level, with 7-10 price quotations for each item/area, totaling 85,000 price quotations. The Japanese CPI is more genuinely a Laspeyres model, quoting prices of 598 goods in 167 municipalities.
Sampling is also a huge problem. The BLS uses a broader definition and conducts household surveys to determine included goods, but the MIAC doesn't conduct statistical sampling and obsolete items are still covered. Until 2000, Japan's CPI didn't include computers but included abacus lesson fees. As to rotation rate, in the US, 25% turn over in a year while in Japan, 10% turn over in 5 years.
The import price index is ideal for looking at biases and is used to assume several biases. The BOJ does the same. We have prices of all of the 90,000 import goods, but BOJ has only about 1,000.
Biases aren't constant every year. Standard deviation of Laspeyres index is roughly 0.2%, which is a huge uncertainty factor.
CPI innovation as in the US isn't conducted in Japan and the Japanese CPI therefore must be handled very carefully. Price stability is 1% inflation in imports.
(Paper: "Defining Price Stability in Japan" [ 1 (PDF-Format 41KB) ] [ 2 (PDF-Format 56KB) ])

6. Q&A Session

(Speaker)

New characteristics were seen as Japan's income surplus grew higher than the trade surplus for the first time in 2005. As long as Japan has a trade surplus, it will have greater accumulated assets overseas and positive effects will be seen in income balance.
Behind the recovery after 2002, there have been disposals of NPLs and corporate sector restructuring efforts on the supply side, and overseas factors (solid economic growth outside Japan (China, US, emerging countries) and a weak yen) on the demand side.

(Speaker)

The CPI revision does not have a serious impact on monetary policy as they were naturally expected when QEP was lifted.

(Speaker)

The biggest problem regarding accuracy of the Japanese CPI is the organization preparing statistics. As the function was dispersed among several ministries/agencies, it was decided to establish a committee in the Cabinet Office to oversee statistics adjustment across ministries. The Statistical Law, enacted in 1946 and has not been revised since then, needs to be revised.

(Speaker)

Compiling statistics is very exciting. If we have few PhDs in statistics, we should increase the budget to hire a good number of PhDs.

Weinstein

It is clear that there are huge measurement errors in the CPI.
Statistical problems may not lie in ministerial staff ability, but in insufficient staff and resources to do an appropriate job.

Slaughter

Looking at trends in the global trade position in the US, FX pass-through has fallen sharply. I don't know what is going on with the US pass-through rate, but the Japanese pass-through may decline over time.

(Speaker)

The US also has problems concerning the different statistical biases and index calculations. In Japan, several organizations conduct statistical surveys, but they need to cooperate and utilize data effectively by exchanging information.

Weinstein

US CPI and Japanese CPI have very similar price quotes, but while the US index is based on multiple price quotes in each city, the Japanese index has fewer price quotes in more cities. For example, the Japanese CPI would be better if prices in different cities were different, but evidence suggests that these price differentials are small.
If you reduce the number of areas and conduct sampling of same goods several times, you don't have to increase price quotes. It is not about the number of quotes but about how to utilize them, information processing, and the type of process that should be used.

Q&A Session with Press

(Q) You say the CPI revision does not have a serious impact on monetary policy.
(A) We have to consider the current CPI as a standard for policy implementation.

(Q) Doesn't it affect data projections?
(A) The change caused by the revision is within our expectation and the policy won't change greatly.

Up Toppage Symposium, Forum