Abstract
The IMF Research Bulletin, a quarterly publication, selectively summarizes research and analytical work done by various departments at the IMF, and also provides a listing of research documents and other research-related activities, including conferences and seminars. The Bulletin is intended to serve as a summary guide to research done at the IMF on various topics, and to provide a better perspective on the analytical underpinnings of the IMF’s operational work.
Japan
Ramana Ramaswamy
IMF surveillance of the Japanese economy, and the policy advice that the organization gives to the national authorities, has relied heavily on analytical work produced by the IMF staff. The research agenda of the Japan desk has been driven, in large part, by the need to grapple with evolving policy challenges. This article provides an overview of the recent research conducted by the IMF staff on Japan.
With the Japanese economy experiencing its worst postwar crisis in recent years, the IMF’s research agenda has shifted from its earlier emphasis on trade and exchange rate issues, to more of a focus on why the 1990s became a “lost decade” for Japan, and the policy options and tradeoffs involved in getting the economy back on track. Much of this research has been collected in two recent books, Aghevli, Bayoumi, and Meredith (1998), and Bayoumi and Collyns (2000).1 IMF staff have also published a number of other articles on Japan.
Why did the Japanese economy stagnate in the 1990s, and why is the recent recovery still so fragile? This question constitutes the main theme of two recent papers—Bayoumi (1999) and Ramaswamy and Rendu (1999).2 Both articles employ a vector autoregression framework and identify the negative and persistent effects of the collapse of asset prices in the early 1990s as the principal cause of stagnant output. While the focus of Bayoumi’s paper is on identifying the channels through which the asset price collapse had a negative impact on activity, the emphasis of Ramaswamy and Rendu’s article is more on how the collapse in asset prices affected the different expenditure components, and it identifies the steep decline in private investment as the main factor behind Japan’s disappointing economic performance in the 1990s. Using somewhat different econometric techniques, both articles find that fiscal stimulus in Japan has had a limited and waning impact on activity. The reasons for the steep decline in business investment, and the impact that this decline had on capital stock and potential output in Japan are, respectively, the main themes of Ramaswamy (2000) and Bayoumi (1999).3
The issue of how monetary policy can provide support to the economy when interest rates are close to zero has stimulated a lively debate in both academic and policy circles. Morsink and Bayoumi (2000) shed light on this debate by analyzing the importance of the bank lending channel in Japan, and identifying how the banking crisis has dampened the monetary transmission mechanism by clogging up the lending channel. Using micro data on bank lending, Woo (1999) provides additional evidence in support of the “capital crunch” hypothesis during 1997–98. Both of these papers point to the importance of resolving the banking problems in Japan as a precondition for sustained economic revival. Towe (1998) addresses a different issue concerning monetary policy—the identification of leading indicators of output and inflation in Japan. Using time series techniques, Towe finds that the relationship between financial variables and future output and inflation has been unstable in recent years, making the task of conducting monetary policy all the more difficult.4
Activist fiscal policy has been one of the main tools used by the Japanese authorities in the latter half of the 1990s to revive a faltering economy, and a number of “stimulus” packages have been the primary conduit through which fiscal support has been provided. Mühleisen (2000a) deconstructs the various stimulus packages, and sheds light on why they have had only a limited impact on reviving activity. Mühleisen’s paper also shows that a sharp deterioration in the tax elasticity played an important role in the worsening of Japan’s public finances in the 1990s. The fiscal challenges facing Japan from a longer-run perspective, particularly given population aging, are discussed in Mühleisen (2000b). Bayoumi (1998) provides a primer for those seeking to understand Japan’s complex fiscal system.5
Given Japan’s systemic importance for the global economy, exchange rate issues have continued to be an important part of the IMF Japan desk’s research agenda.6 Meredith (1998) develops a general equilibrium model to provide a comprehensive analysis of the forces governing the exchange value of the yen, and the staff’s approach to evaluating exchange rate misalignments. Ramaswamy and Samiei (2000) provide a forward looking model of the exchange rate to evaluate the effectiveness of interventions in the yen-dollar market. Chadha and Prasad (1997) provide a structural vector autoregression model to explore the types of shocks that have driven variations in the real exchange rate, and analyze the relationship between the real exchange rate and the business cycle in Japan.
As the Japanese authorities have embarked on the process of reforming their capital and labor markets, the IMF’s research has also focused on structural issues.7 Levy (2000) discusses the factors that are driving Japanese corporations to restructure, and evaluates the effectiveness of recent restructuring efforts. Faruqee (2000) develops a general equilibrium model to examine the economic implications of aging in Japan and the policies designed to address it. Prasad (1997) analyzes the determinants of the long-term trends in the sectoral composition of employment and output, shedding light on the speed with which structural change has taken place over different time periods in Japan. Nagaoka (2000) explores the links between labor and product markets in Japan.
Bijan B. Aghevli, Tamim Bayoumi, and Guy Meredith, editors, Structural Change in Japan: Macroeconomic Impact and Policy Challenges (Washington: IMF, 1998); Tamim Bayoumi and Charles Collyns, editors, Post-Bubble Blues: How Japan Responded to Asset Price Collapse (Washington: IMF, 2000).
Tamim Bayoumi, “The Morning After: Explaining the Slowdown in Japanese Growth in the 1990s,” IMF Working Paper 99/13, 1999, and forthcoming in the Journal of International Economics; Ramana Ramaswamy and Christel Rendu, “Japan’s Stagnant Nineties: A Vector Autoregression Retrospective,” IMF Working Paper 99/45, 1999, and forthcoming in IMF Staff Papers.
Ramana Ramaswamy, “Explaining the Slump in Japanese Business Investment,” in Bayoumi and Collyns (2000).
James Morsink and Tamim Bayoumi, “Monetary Policy Transmission in Japan,” in Bayoumi and Collyns (2000); David Woo, “In Search of ‘Capital Crunch’: Supply Factors Behind the Credit Slowdown in Japan,” IMF Working Paper 99/03, 1999; Christopher Towe, “Structural Change and Information Content of Financial Variables for Monetary Policy,” in Aghevli, Bayoumi and Meredith (1998).
Martin Mühleisen, “Too Much of a Good Thing? The Effectiveness of Fiscal Stimulus,” 2000a, in Bayoumi and Collyns (2000); Martin Mühleisen, “Sustainable Fiscal Policies for an Aging Population,” 2000b, in Japan: Selected Issues, IMF Staff Country Report 00/144 (Washington: IMF, 2000). Tamim Bayoumi, “The Japanese Fiscal System and Fiscal Transparency,” in Aghevli, Bayoumi and Meredith (1998).
Guy Meredith, “The Yen: Past Movements and Future Prospects,” in Aghevli, Bayoumi and Meredith (1998); Ramana Ramaswamy and Hossein Samiei, “The Yen-Dollar Rate: Have Interventions Mattered?,” IMF Working Paper 00/95, 2000 (this paper was presented at the NBER’s “Japan Project” conference in Tokyo, September 2000); Bankim Chadha and Eswar Prasad, “Real Exchange Rate Fluctuations and the Business Cycle: Evidence From Japan,” IMF Staff Papers, September 1997.
Joaquim Levy, “Financial Reorganization and Corporate Restructuring in Japan,” in Bayoumi and Collyns (2000); Hamid Faruqee, “Population Aging and Its Macroeconomic Implications,” in Japan: Selected Issues, IMF Staff Country Report 00/144 (Washington: IMF, 2000). Eswar Prasad, “Sectoral Shifts and Structural Change in the Japanese Economy: Evidence and Interpretation,” Japan and the World Economy, Vol. 9, No. 3, 1997; Takashi Nagaoka, “Japan: The Unemployment-Deflation Puzzle,” in Japan: Selected Issues, IMF Staff Country Report 00/144 (Washington: IMF, 2000).