The following is a summary of the Conference prepared by and under the responsibility of the secretariat.

1. Time and Date: Monday, June 25, 2007, 9:30 to 17:00
2. Venue: ESRI, Cabinet Office, Tokyo (Government Building No. 4, Room 406)
3. Program:
   

   Opening remarks:Masahiro Kuroda, President, Economic and Social Research Institute (ESRI)

   <Session 1: The Industry Origins of Japanese Economic Growth and Inflation Measurement>

   Chair:	Anil Kashyap, University of Chicago
   Presenter:	Dale Jorgenson, Harvard University "The Industry Origins of Japanese Economic Growth"
   Presenter:	David Weinstein, Columbia University "Measurement of Inflation Rate in Japan"
   Discussant:	Shigenori Shiratsuka, Bank of Japan

   <Session 2: Introduction of Research Issues in Each Subcommittee>

   Chair:	Yutaka Harada, Daiwa Institute of Research
   Presenter:	Masahiro Okuno, University of Tokyo "Regulatory Reforms and Structural Issues"
   Presenter:	Kyoji Fukao, Hitotsubashi University "TFP, Industrial Structure, IT, and Other Macroeconomic Aspects"

   <Session 2: Introduction of Research Issues in Each Subcommittee (continued)>

   Chair:	Juro Teranishi, Nihon University
   Presenters:	Akiyoshi Horiuchi, Chuo University "Nonperforming Loans, Banking System (Prudence Policy), and Land Policy"
   Presenter:	Hiroshi Yoshikawa, University of Tokyo "Monetary Policy and Inflation/Deflation"

   <Session 2: Introduction of Research Issues in Each Subcommittee (continued)>

   Chair:	Noriki Hirose, Vice President, ESRI
   Presenters:	Yasushi Okada, Research Fellow, ESRI "Fiscal Policy Problems Including Taxation and Social Security Payment"
   Presenter:	Ryo Kambayashi, Hitotsubashi University "Labor Market and Income Distribution"

• A series of international conferences under the joint auspices of the National Bureau of Economic Research (NBER) and the Economic and Social Research Institute (ESRI), initiated by Professor Koichi Hamada, the first president of ESRI, have taken up a range of important issues and problems.
• Just several weeks ago, the government announced that Japan's gross domestic product (GDP) grew at an annualized rate of 3.3% in real terms in the first quarter of 2007. Although many problems still remain, the Japanese economy has now entered a new growth phase. Private consumption remains weak, and it is too early to say that Japan has fully recovered from deflation. In the meantime, income disparities are widening, raising concerns among some observers. Under such circumstances, it is important to formulate a strategy for autonomous or sustainable growth, further open the market, and make continuous efforts to enhance productivity through innovation.
• With the aim of examining the Japanese economy in the past 25 years, a study group was established within ESRI in April 2006, and it has since been engaged in extensive discussion on various relevant issues. This Conference is meant to be an international kickoff meeting on this theme. Subcommittees of the study group will be reporting on their research results, in which the state of productivity will be the issue of utmost importance. Today, Professor Jorgenson will present new findings concerning productivity. Meanwhile, as preparation for the establishment of a new statistics committee is now underway in Japan, we will have some input from Professor Weinstein, who will discuss problems relating to Japanese statistics.

• In 2005, together with Mr. Nomura, I published a research paper on productivity and economic growth. My presentation today is based on more detailed data than those on which the published version of that paper was based. To enable comparison between Japan and the United States, the database has been enhanced, such as with regard to subjects including information technology (IT) devices and software, land, and inventories as asset items.
• The contribution of capital input from IT increased in the U.S. in the periods of 1973-1990 and 1990-1995, and then in a more significant way in the period of 1995-2000. In Japan, the period of 1960-1973 was a golden period of economic growth, during which, however, the IT contribution remained low. In the period of 2000-2004, the IT contribution decreased in the U.S. and increased in Japan.
• As a source of total factor productivity (TFP) growth, IT-related activities made a significant contribution in the U.S., particularly during the IT boom in the period of 1995-2000. After 2000, however, the contribution of these activities decreased because of the decline of IT prices.
  A comparison between Japan and the U.S. in terms of the IT industry's contribution to TFP growth shows that the degree of contribution was higher in Japan in the period up to 1990 but that the level of IT contribution in the U.S. exceeded that of Japan in the period of 1995-2000.
• A comparison between Japan and the U.S. in terms of sources of economic growth in the period of 2000-2004 shows that the contribution of TFP growth to economic growth in the U.S. was roughly 2.5 times that in Japan. While the two countries did not differ much in the contribution of IT investments, the contribution of non-IT investments in Japan was less than one half the level in the U.S. The contribution of labor input was negative in both countries.
• In conclusion, it is fair to say that Japan lags behind the U.S. in IT investments, although the Japanese IT industry is already highly developed and internationally competitive. Meanwhile, the slowdown of the Japanese economy is attributable to the slowdown of TFP growth. The slowdown of TFP growth in Japan's service sector is attributable to the weakness of the wholesale and retail industries, whose U.S. counterparts have demonstrated dynamic changes in the past 10 years. Another big difference is in other segments of the service sector, including various services for corporate and individual customers, which are showing robust growth in the U.S. but probably negative growth in Japan.
  (Paper: "The Industry Origins of Japanese Economic Growth"
  Cf.[http://post.economics.harvard.edu/faculty/jorgenson/papers/Industry_origin_JECGRWTH_050105.pdf]; Presentation material: "Economic Growth and Information Technology in the U.S. and Japan" [ 1 (PDF-Format 432KB) ] [ 2 (PDF-Format 469KB) ] [ 3 (PDF-Format 476KB) ] [ 4 (PDF-Format 417KB) ] [ 5 (PDF-Format 489KB) ] [ 6 (PDF-Format 623KB) ] [ 7 (PDF-Format 746KB) ])

• The low productivity of Japan's service sector was cited as a factor behind the productivity gap between Japan and the U.S. from 1995 onward. What, in your view, are the reasons for the low productivity of Japan's service sector?

• I would say it stems from differences in the Japanese and U.S. competition policy for service industries. Japanese service industries are protected both from international trade and from domestic competition. New entries are restricted and a cartel-like structure is maintained. The same can be said about Europe, but the degree of protectiveness is far greater in Japan. These differences in competition policy do, indeed, constitute a significant factor.

• It may be the case that the U.S.-Japan gap in non-IT sector productivity is attributable to the gap in the use of IT. It is presumable that higher efficiency in the use of IT in the U.S. has resulted in the difference in the performance of the two counties.

• That would a factor, too. But the fact that Japan lags in IT investments is more important. In the U.S., robust IT investments began in 1995 and a wave of creative destruction has taken place. This means that while there has been a rise of new entrants and businesses on one hand, there have been those forced out of the market on the other. Such a process has yet to take place in Japan in the same way as in the U.S.

• In doing research on productivity and labor input, it is important to pay special attention to the latter half of the 1980s. Labor laws and regulations changed substantially in the latter half of the 1980s and into the 1990s. Such regulatory changes might have resulted in higher labor costs, thereby lowering the contribution of labor input. Also, I wonder whether the decline in TFP growth in the 1990s was a capacity problem.

• In their study, Hayashi and Prescott showed that the contribution of labor input in the period of 1990-1995 was negative. Factors behind this are as pointed out in Hayashi-Prescott and changes in the labor law and regulations constitute one of the factors.
• The decline in TFP growth in the 1990s is probably a cyclical decline, which is peculiar to Japan. From 1995 onward, TFP growth has been picking up and, particularly in recent years, growth in output per unit of input, in addition to a cyclical recovery, has been observed. As such, the recovery in TFP growth has begun to become substantive.

• It was in the 1990s that the contribution of labor input turned negative in Japan. This was a period in which substantial changes were made in labor laws and regulations, and Japan was, in terms of the economic cycle, in recession. Meanwhile, in the U.S., labor input increased during the same period of time, particularly with the latter half (1995-2000) being a boom period. Considering the fact that the U.S.-Japan gap began to emerge in the 1990s, it is fair to say that differences in the contribution of labor input in the U.S. and Japan have represented a major factor.

• Would it not be necessary to refer to causal relations or economic mechanisms, such as how investments in this period would affect TFP in this period and the next?

• In terms of causal relations, if we consider a model that explains the correlation between labor input and TFP growth, investments would be an endogenous variable while both labor input and TFP growth would be given as exogenous variables.

• What is important in considering differences between the Japanese consumer price index (CPI) and the U.S. CPI is the upper-level substation bias. The two countries use different chaining methods. Japan's handling of the lower-level substitution bias is also disputable.
  Japan is not using geometric averaging because lower-level price samples are limited and such samples are not taken randomly.
  Japan uses the hedonic approach for a very limited scope of products such as digital cameras, whereas the U.S. applies it to a wide range of products. This also generates differences between the Japanese CPI and the U.S. CPI. Meanwhile, in the U.S., the upward bias from new goods is estimated at 0.8% per year.
• The U.S. CPI uses a Tornqvist formula for chaining, whereas Japanese "chaining" is what the U.S. calls "annual weight updating" and not chaining in the ordinary sense. Simply updating the weights of the base period and the current period would not eliminate the substitution bias in the CPI. Rather, frequent weight updating would result in an excessively high weight when prices are rising and an excessively low weight when prices are falling.
• When we calculate the Fisher index for Japan using the Paasche and Laspeyres indices, we can see that the bias is measured to be 0.25 for the years 2000 and 2005. Our study estimated the upper-level substitution bias to be 0.2.
• With respect to the lower-level substitution bias, the Boskin Report has pointed out that the use of geometric averaging would lower the U.S. CPI by 0.5 percentage points. Geometric averaging is not properly used in Japan because random sampling is not applied. In the U.S., a series of studies have estimated the impact of geometric averaging on the CPI, showing that the bias would be around 0.4% on average. It would be reasonable to assume a similar degree of bias for Japan.
• Changes in the retailing industry and purchasing patterns result in an outlet bias. Although it is difficult to measure this bias, we estimate that the outlet bias in the Japanese CPI is around 0.2 percent per year.
• In short the bias in the U.S. CPI has been reduced since 1999 by using the appropriate methodology of chaining at the upper level and geometric averaging at the lower level. However, the bias in the Japanese CPI remains uncorrected both at the upper and lower levels. As a result, the Japanese CPI is biased upwards by 0.8 percentage points relative to the U.S. CPI. With sampling error and other factors taken into account, one cannot be confident that there is no deflation unless the inflation rate reaches 2%. Failure to correct for the existing bias would result in massive costs for the Japanese government.
  (Research paper/Presentation material: "Defining Price Stability in Japan: A View from America" [ 1 (PDF-Format 566KB) ] [ 2 (PDF-Format 387KB) ] [ 3 (PDF-Format 416KB) ] [ 4 (PDF-Format 432KB) ] [ 5 (PDF-Format 398KB) ] [ 6 (PDF-Format 374KB) ] [ 7 (PDF-Format 420KB) ] [ 8 (PDF-Format 249KB) ])

• Because this topic is unrelated to my current tasks at the Bank of Japan (BOJ), my discussion here represents my personal views and does not reflect the official views of the BOJ. This is the second time to discuss this paper. Compared to the previous version, this latest version has fewer factual errors and less misrepresentation of my work. But fundamental problems remain unresolved.
• From the viewpoint of monetary policy making, it is crucial to distinguish between "sustainable price stability" and "measured price stability." Although measurement errors in price indexes and a safety margin against the risk of deflation spiral are important factors, Mr. Weinstein's paper places too much emphasis on measurement errors and it is extremely limited in scope.
• With respect to the numerical definition of price stability, the price index of any country contains an upward bias. An overestimation of inflation rates resulting from upward biases also means that the growth rate and real interest rates are underestimated. When measurement errors are corrected, the underestimation of the real interest rates would be corrected and a smaller safety margin would be required.
• Making a comparison between the bias of Japanese CPI and that of the U.S. one. We estimate the difference of the two countries is 0.9% points in my 1998 and 1999 papers. In 2005 and 2006, there were no changes in the upper- and lower-level substitution bias, but the total bias was lowered because of a decrease in the quality bias. Meanwhile, in the latest version of his paper, Mr. Weinstein has revised the total bias to 1.8 percentage points as compared to 2.0 percentage points in the previous version. But these figures are extreme guestimation in which differences in economic structure and calculation method were not taken into consideration. Though the evaluations of measurement errors are more or less guestimation, it is important to take country-specific factors into account. Simply applying empirical findings about U.S. CPI to the case of other countries is inappropriate.
• Lower-level substitution is a U.S. specific problem, and it is not relevant to Japan. The U.S. uses random sampling with loosely-defined specifications. This practice tends to result in an upward bias. Under the Japanese sampling method, a single specific product is chosen for each item surveyed, and it does not always generate an upward bias.
• The upper-level substitution arises from the difference in the calculation formula applied, i.e., a Fischer formula or a Laspeyres formula, and the resulting gap-zero in the base year-expands with the passage of time. The estimates by Mr. Weinstein seem to be overstated. According to my calculations, the gap was zero in 1990 and began to expand thereafter. This means that, in Japan, the use of the hedonic approach would result in greater price variability and dispersion, hence, the expansion of upper-level substitution.
• Finally, I would suggest that Mr. Weinstein focus solely on the issue of measurement and change the title of his paper accordingly. He also needs to improve his guestimations by taking country-specific factors into account and to provide a list of references.
  (Presentation material: "Comments on 'Defining Price Stability in Japan: A View from America'" [ 1 (PDF-Format 521KB) ] [ 2 (PDF-Format 442KB) ] [ 3 (PDF-Format 437KB) ])

• I do not think that the Japanese CPI contains the bias exactly as argued by Mr. Weinstein. He said that the Japanese CPI is prone to be biased upwards because the use of hedonics is not as broad as in the U.S. However, while the U.S. uses hedonic regression in calculating the price index for refrigerators, Japan uses the overlapping method. We cannot compare refrigerators as a single type of item. Thus, we can instead compare a group of products including refrigerators in the middle classification level and the result is that the degree of downward adjustment is greater with the Japanese method. In recent years, the prices of industrial products have been experiencing a downward trend. Therefore, it is unreasonable to conclude that the Japanese CPI is biased upwards simply because the hedonic approach is not used.
• Mr. Weinstein also spoke about the lower substitution bias. However, when we calculate the price index for beer in Tokyo as a geometric average of the prices of the Asahi, Sapporo, and Kirin brands, the resulting figure is hardly different from the published CPI figure.
• With regard to our response to new products, we have been making efforts to quickly shift to new products. Out of some 600 items surveyed, more than 10 percent are replaced every year.
  (Presentation material: [ 1 (PDF-Format 99KB) ] [ 2 (PDF-Format 126KB) ] [ 3 (PDF-Format 176KB) ])

• The upper-level substation bias, which is calculated as the difference between the Fischer index and the Laspeyres index, was 0.2 in 1980 and 0.25 in 2005. Meanwhile, the fact that the Japanese CPI is down by 0.5% when the base year is moved to 2006 indicates the presence of a bias.
• The U.S. uses random sampling whereas Japan does not. Therefore, even when sampling similar products, a bias does exist.
• My estimates have been referred to as guestimation, but I believe them to be reasonable. One should be doing serious research, rather than arguing.
• Japan seems to be rotating 10% of its sample every year but the rate of sample rotation in the U.S. is 2.5 times that of Japan. Japan should be paying more attention to statistics.

• Let me say one thing about the measurement of the Japanese CPI. Because the Japanese price survey is conducted on items specified by brand, the simple arithmetic average reduces the margin of error. In contrast, the U.S. does not specify any brand for items covered in the survey. So, in the case of beer, a survey-taker would visit a retailer and check the price of the best-selling beer there. This necessitates the use of various substitution biases. These are simply differences in survey methods and underlying philosophies, and they do not represent the kinds of issues that would compel Japan to correct its way of aggregating data.

• Despite drastic changes in external and internal environments in the past 25 years, the Japanese corporate and economic systems failed to change sufficiently. I will examine why this was the case from the viewpoints of: 1) how environmental factors changed; 2) how systems changed; and 3) what factors impeded changes in systems when environments changed. With respect to the environmental factors, tensions increased with the progress of globalization not only in terms of economic aspects but also with regard to non-economic aspects. Trade friction, the way in which Japan contributes to the formation of the international order, and policy measures impeding the entry of foreign companies and capital into the Japanese market can be cited as examples of external environmental factors. As domestic environmental factors, the aging of the Japanese population and the rapid development of information technology (IT) emerged as major challenges following the end of the "catch-up" phase. With respect to the corporate system, there have been developments such as the collapse of the long-term employment system, increased use of outsiders rather than employees promoted internally, and recruitment of new graduates not only in spring but also in autumn. With regard to corporate governance, tensions are building up, as seen in an increase in the number of mergers and acquisitions (M&As), a shift to direct financing, and the appointment of outside auditors. In terms of the government-business relationship, it is necessary to examine the extent to which deregulation and regulatory reform have fulfilled their intended roles. At the same time, since Japan's policy regime is now in the process of shifting from one that focuses on the fostering of industries to a regime that is more competition-policy-oriented and of a fair trade commission type, I would like to consider this ongoing process by examining the relevant data.
• A fixed relationship between stakeholders was the norm 25 years ago in Japan. Back then, stakeholders had vested interests and were able to earn political rents. It has been very difficult to change this structure. The need to change this mechanism has been recognized. However, a situation existed such that delays in solving relevant problems were allowed or forced, and in some cases attempts to implement institutional changes induced various problems and types of confusion unique to an economy in transition. I would like to examine, in terms of a check-and-balance approach, whether politics and the judiciary fulfilled their respective roles.
  (Presentation material: "Japanese Economy and Economic Policy in the Last Quarter Century" [ (PDF-Format 85KB) ])

• What happened in the Japanese service sector in the past 25 years should be examined, for instance, by hypothesizing the presence of entry barriers and/or customary business practices, the slow diffusion of IT, and the availability of life support by banks.

• The long-term employment system and labor-related laws and regulations, which have been cited as reasons behind the delayed restructuring, should be examined.

• A deregulation model that incorporates discrepancies between optimal and actual deregulation as well as competence in reform implementation should be considered.

• The service sector-and the financial sector in particular-is a very important point of discussion. I would like to consult with the secretariat to make necessary adjustments with other subcommittees. Also, I believe changes in labor-related laws and regulations will be a point of discussion.

• A volume on the macro-economy will be composed of three parts, respectively focusing on demand-side factors, supply-side factors, and macro-economic equilibrium. With respect to demand-side factors, we will examine reasons behind the stagnation of the Japanese economy, using data on the GDP gap, full-employment GDP, consumption and saving behavior, and so forth. As to supply-side factors, we will analyze labor supply, capital stock, IT, and innovation on the macro-, industry-, and firm-levels. Regarding macro-economic equilibrium, asset prices, the economic bubble, real interest rates, and natural real interest rates will be analyzed.
• Let me introduce some of our findings in the analysis of supply-side factors. An international comparison of economic growth in the periods of 1980-1995 and 1995-2004 shows that Japan's growth rate was the highest among those of the major economies in the period up to 1995 but the lowest from 1995 onward. The contribution of TFP growth increased for the U.S., but no such acceleration can be observed for other countries. A comparison of TFP growth by sector shows that Japan is ahead of the U.S. in the area of electrical machinery and communication equipment, but it falls behind the U.S. in the non-ICT manufacturing sector as well as in the service sector.
• A decomposition of Japan's TFP for all manufacturing industries into four types of effects-"exit effect," "entry effect," "redistribution effect," and "within effect"-shows that the decline in Japan's TFP growth from 1990 onward is attributable to the shrinkage of the within effect. Meanwhile, it is also shown that the exit effect has provided a negative contribution. This implies that low-productivity plants continue to operate while high-productivity plants have been closed down. Meanwhile, a comparison of labor productivity by sector shows that performance has been poor in the construction, transportation, and electricity and gas industries. The redistribution effect is negative for each of these three industries, because low-productivity companies continue to operate and high-productivity companies have exited the market.
  (Presentation material: "Synopsis of the Volume on the 'Macro-Economy'" [ 1 (PDF-Format 636KB) ] [ 2 (PDF-Format 521KB) ] [ 3 (PDF-Format 343KB) ] [ 4 (PDF-Format 538KB) ])

• Growth factors are being closely examined on the macro-level as well as on the firm-level. In the Japanese manufacturing sector, productivity performance is fairly satisfactory, particularly in the automobile and telecommunication equipment industries. The problem is what to do with those failing to respond to changes in the business environments surrounding them. The non-manufacturing sector is the central issue in this regard.
• Over the past 25 years, foreign exchange rates changed drastically. In the presence of shocks of such kind and scale, it is difficult to ensure macroeconomic stability. By including discussion on the issue of foreign exchange, I believe this volume will be further enhanced.

• I believe that the issue of foreign exchange will be discussed in other volumes. But as far as this volume is concerned, we will take it up in the section dealing with the redistribution of resources.

• When we look at literature on productivity in the 1990s, we can see that views are divided about the size of the productivity gap between the manufacturing and non-manufacturing sectors.

• The measurement of productivity underwent major reform after the OECD task force report on the matter was issued. Now that the OECD Productivity Manual has been published, approaches to productivity measurement are being harmonized.

• Despite the importance of data, statistics necessary for the accurate measurement of productivity have been absent in Japan, resulting in material measurement errors. By making data adjustments based on the Canberra Group's proposal, as in the estimates by Mr. Jorgenson or in the Japan Industrial Productivity (JIP) Database, such measurement errors can be reduced to an immaterial level. Also, it is necessary to change the treatment of software and R&D in the national accounts, without which there will be no accurate international comparison.

• Our research group is in charge of issues concerning nonperforming loans, the financial system, and land policy. We will focus on: 1) why and how the bubble was created in the late 1980s; 2) how the problem of nonperforming loans began to unfold in the first half of the 1990s and then evolved into the banking crisis; and 3) what impacts the crisis of the financial system had on the macro-economy.
• With respect to the bubble formation, we will examine how deregulation of the financial sector related to the creation of the bubble and what impacts the Basel Capital Accord gave rise to in terms of financial system stability. We will also analyze the relationship between the land price problem and the financial sector along with the issue of land prices and the relevant tax policies.
• Regarding the banking crisis, we will evaluate the financial administration vis-à-vis the banking sector, while looking into how changes in the legal framework for corporate bankruptcy and rehabilitation affected the Japanese economy at a time when the health of domestic banks was fast deteriorating. We will also focus on bank management, i.e., how bank managers responded when faced with the state of crisis. Furthermore, we will also touch on the relationship between the crisis that engulfed Japanese insurance companies and the trends in the stock market.
• Concerning the relationship between the financial system crisis and the macro-economy, we will conduct research on: the relationship between the Asian currency crisis and Japanese banks' behavior; the impacts of monetary policy on banks' lending behavior and the macro-economy; changes in balance sheets-on the sides of both lenders and borrowers-and related effects on banks' lending behavior; and the relationship between the bursting of the bubble and the subsequent long-term economic doldrums in the 1990s.
  (Presentation material: "Economic and Social Research Institute" [ 1 (PDF-Format 47KB) ] [ 2 (PDF-Format 49KB) ])

• The nature and characteristics of what happened in Japan can be identified more precisely by comparing its experience with those of other countries.

• The characteristics of Japan's bank-centered financial system should be analyzed. Under this system, potential financial imbalances easily build up in an expansionary period and resulting shocks cannot be fully absorbed.

• An international comparison of asset management companies is also important.

• What roles did the monitoring system play in Japan's financial system and how was the performance?

• What roles did securitization play in the financial crisis?

• I am interested in changes in the behavior of banks and companies. I wonder whether it will be possible to determine whether or not banks extended loans to the wrong borrowers by using productivity data.

• We do recognize that the distinction between characteristics unique to Japan and those observed in both Japan and other countries can be further clarified by conducting an international comparison.
• It is necessary to consider risks inherent to Japan's bank-oriented financial system.
• The monitoring system as an aspect of the financial system has been and will be analyzed in the process of changes in the government's banking policy.
• It has been pointed out that the banking crisis might not have been so serious if securitization had developed more smoothly. We would like to try to determine whether this is the case.
• We intend to look into the kinds of damage that manufacturers and non-manufacturers respectively received in terms of their relationships with banks and the impacts that banks received from the damage incurred by their borrowers.

• The theme of our project is to examine the relationship between deflation and monetary policy, and in particular, the relationship between money supply and deflation. Some people say that deflation can be stopped by increasing money supply to a sufficient level because deflation, in its ultimate nature, is a financial phenomenon. But others argue that no tight relationship can be observed between deflation and money supply. Now that the state of deflation has substantially changed, it is a good time to revisit this question.
• The BOJ lifted the zero-interest rate policy in 2000. According to my memory, it was in 2001 that the government recognized the presence of deflation and began to call for the overcoming of deflation. Subsequently, the problem of nonperforming loans became serious and the frequency of newspaper articles reporting on deflation peaked in 2002.
• Data on money and prices on a cumulative basis show only a weak relationship between money supply and prices. Validity can be recognized when we follow the classical macroeconomic approach. This involves looking at the economy in two segments with respect to prices. One segment is the raw materials sector where demand determines prices. The other is the industrial products and services sector in which pressures in the real economy determine prices basically following the Phillips curve. I believe this approach has substantial validity.
• Deflation is approaching its end. This means that a sharp rise in exports to China and an increase in demand have led to the recovery of the real economy, whereby prices have stopped falling. Therefore, we cannot conclusively say that the role of money is important. The BOJ introduced quantitative easing policy in 2001 and our experience with this policy has been accumulated as data to a considerable extent. And the general consensus is that quantitative easing is not very effective in impacting the real economy or prices.
  (Presentation material: "Deflation and Monetary Policy" [ 1 (PDF-Format 287KB) ] [ 2 (PDF-Format 319KB) ])

• The perception that money has little impact on prices is worth considering. Does the Chinese economy have a significant impact on the Japanese economy?

• The inflation rate stayed at 1% over the past 10 years despite cyclical changes, foreign exchange fluctuations, the financial crisis, and various other events that occurred during such period. Why has the inflation rate remained stable?

• The financial system was in a state of dysfunction under the two types of deflation-i.e., asset price deflation and general price deflation-and the implementation of monetary policy was different from that under normal conditions. These factors should be taken into consideration.
• The question of price stability should be addressed in a medium-to-long-term framework.
• Making policy proposals involves controlling expectations. There exists the problem that simply making an announcement or commitment can cause changes in expected values. Gaps between practice and theory must be considered.

• This subcommittee will examine the management of fiscal policy in the 1990s, consider and evaluate how structural and institutional reforms in the years since 2000 have improved the efficiency of fiscal policy, and evaluate the redistribution effects of these policy measures.
• As a result of repeated tax cuts and expanded public works investments, Japan's fiscal deficit has increased to a level that is the highest among the developed countries. There is a prevailing view that against the backdrop of this dire fiscal condition, uncertainty about the future is growing and the effectiveness of Japan's fiscal policy has been lost. Thus, we would like to examine whether non-Keynesian effects can be identified.
• We believe that the sustainability of Japan's fiscal deficit is gradually recovering as a result of tax policies, cutbacks on public works investments, and social security reform implemented in the years since 2000. Thus, we will try to concretely verify that these fiscal and social security reform initiatives had positive impacts. At the same time, however, there is no denying the possibility that these reform initiatives resulted in a decrease in the redistribution effects of fiscal policy. Thus, we will also examine how inter- and intra-generational redistribution changed as a result of these reform initiatives.
  (Presentation material: "Public Finance and Social Security Reform" [ 1 (PDF-Format 399KB) ] [ 2 (PDF-Format 323KB) ])

• The consensus in Japan seems to be that fiscal policy has no impact on the economy. But I believe that the tax increase in 1997 had a negative impact on the economy.
• The ways in which the market viewed the sustainability of debt should be examined.

• Health and medical care system reform and local public finance reform should be addressed.

• Why was the government so slow to implement tax reform as a solution to macro-economic problems? Why does Japan's maximum tax rate remain high relative to those in other OECD countries?

• The efficiency of public works projects must be examined.

• We are aware of the view that the 1997 tax increase and drastic cuts in government expenditures are the cause of the crisis. But the average view of Japanese scholars specializing in public finance is that the impact of these factors upon total demand was almost neutral, although the timing of spending was changed.
• The issue of sustainability has two aspects. One aspect concerns the question of whether or not sustainability was in a serious condition, while the other relates to the perception that fiscal reform was implemented because sustainability was in a serious condition. With respect to this issue, we will focus on sustainability per se.
• The efficiency of public works projects will be taken up as an important subject.
• We will also address medical care system reform and local public finance reform as major subjects. Redistribution between the central and local governments will be one of the focal points.
• It has been pointed out that Japan was slow to implement tax reform. But we believe that the tax rates were lowered over a relatively short period of time.

• Japan's labor market has been transformed through the experience of recession. The objective of our group is to provide an overview of developments in the Japanese labor market in the latter half of the 1980s and to summarize the relevant studies in Japan in the 1990s. To achieve this end, we have set up five major research subjects and 17 specific review items.
• The first subject relates to macroeconomic perspectives, under which we will review the following three items: 1) Phillips curve and nominal wage rigidity, 2) matching in the labor market, and 3) job creation and destruction.
• Second, we will examine the micro-structure of the labor market. This subject is composed of the following four review items: 1) age-wage profile, 2) performance-based pay, 3) job change and training, and 4) polarization of labor hours.
• Third, we will observe the labor market in four segments, namely, as 1) a market for the young generation, 2) a market for the elderly, 3) a female labor and a market for married females, and 4) a market for part-timers and other non-regular workers.
• The fourth subject concerns the role of formal institutions. For this, one of our members will write on labor market policy and minimum wage.
• The last subject involves income distribution and inequality. This is composed of the following four items: 1) earnings inequality, 2) wage inequality, 3) education and wage inequality, and 3) geographical wage inequality.
  (Presentation material: "Labor and Income Distribution Group Preliminary Report" [ 1 (PDF-Format 265KB) ] [ 2 (PDF-Format 360KB) ])

• The contribution of labor to growth has changed considerably since 1980 or so. I would like you to investigate the reasons behind this.
• Regarding your research on job creation and destruction, I wonder whether it would be possible to discuss these issues in connection with corporate dynamism.

• In addition to wage and earnings inequality, the distribution of wealth is also an important topic.

• Now that Japan is undergoing major demographic changes, it is important to capture such dynamic population trends. It has been found that the quality of labor in Japan is relatively high. Attention should be paid to the quality of labor as well as to changes in demographics.

• The contribution of labor to growth will be covered by other sections.
• With regard to the relationship between firm dynamism and employment, the relevant data sets are limited in Japan, but we would like to try to expand them.
• We will try to include the distribution of wealth within the scope of our research. However, this would make our findings prone to material measurement errors.
• Changes in the labor market are dependent on changes in the relevant regulations. We would like to incorporate such regulatory factors into our discussion.

• The time allotted for this conference is now drawing to an end and I would like to take this opportunity to thank everybody for their cooperation. Before concluding the conference, I would like to invite members of the media to raise questions and interview participants.

• If you have any questions, this is your final chance.

- No questions -

• At the conclusion of the conference, I would like to thank you again for your cooperation.