KEO Discussion Paper No. 138

Assessing the Eﬀects ofJapanese Industrial Policy Change during the 1960s
Kozo Kiyota
Keio University and RIETI
Tetsuji Okazaki
University of Tokyo and RIETIApril 2016
Assessing the Effects of Japanese Industrial Policy Change
during the 1960s *Kozo Kiyota †Keio University and RIETI
Tetsuji Okazaki ‡The University of Tokyo and RIETI

Abstract
This paper provides a systematic analysis of the effects of the industrial policy change inthe 1960s in Japan. We utilize a panel of 227 manufacturing industries between 1960 and
1969. We find that on the one hand, the removal of de facto import quotas had
significantly negative effects on real output, real output per establishment, andemployment. On the other hand, for those industries where import quotas were removed,
tariff protection was effective in maintaining real output and employment. However, thisdoes not necessarily mean the success of industrial policy change because neither tariff
protection nor the removal of quotas contributed to productivity growth. In that sense, theindustrial policy change had limited effects.

Keywords: Import quota, Industrial Policy, Productivity, Postwar JapanJEL Classification Code: F1, N15*

This research was conducted as part of a research project that was undertaken at the ResearchInstitute of Economy, Trade and Industry (RIETI). We appreciate the helpful comments andsuggestions received from Masayuki Morikawa and two anonymous referees. The usual disclaimers
apply.
†
E-mail address: kiyota@sanken.keio.ac.jp‡
Corresponding author. Tel: +81 3 5841 5530; fax: +81 3 5841 5521. E-mail address:
okazaki@e.u-tokyo.ac.jp

1.

Introduction

Quantifying the effects of industrial policies is one of the most important research issues
in various fields of economics including industrial organization, international economics,
development economics, and economic history (Noland and Pack, 2003). 1 Of theindustrial policies applied in various periods and countries, one of the mostcontroversial is Japanese industrial policy during the postwar period. 2 This controversy
arises because the success of some Japanese industrial policies has been used to justify
such targeting policies in other countries, including the United States. 3 Accordingly,
several studies have attempted to quantify the effects of Japanese industrial policy (e.g.,
Beason and Weinstein, 1996; Kiyota and Okazaki, 2005, 2010).
Even though these previous studies are insightful, there is some room for
improvement. For example, Kiyota and Okazaki (2005, 2010) utilized firm-level data,
but the scope of these studies is not necessarily broad because Kiyota and Okazaki(2005) focused on large firms, while Kiyota and Okazaki (2010) focused only on cotton
spinning firms. Beason and Weinstein (1996) utilized relatively aggregatedindustry-level data (13 manufacturing industries) from 1955 to 1990. This makes it
difficult to control for heterogeneity within those aggregated industries, despite the factthat targeting was conducted at a detailed industry level. Furthermore, it should be notedthat during the period that they examined, there was a substantial change in the1

We use the term “industrial policies” in the broad sense of “policies that stimulate specific economic
activities and promote structural change” (Rodrik, 2008). As we will discuss later, among the various
types of industrial policies, this paper focuses on the removal of de facto import quotas through theforeign exchange allocation system in Japan.
2
The Japanese government implemented industrial policies to control international trade, investment,
technology imports, foreign exchange, etc. (Johnson, 1982; Komiya et al., 1988; Okimoto, 1989;
Noland and Pack, 2003).
3“In fact, it is the success of Japanese targeting that is often used as the justification for targeting in
the United States” (Beason and Weinstein, 1996, p. 286).

1industrial policy regime (Ito and Kiyono, 1988; Asai, 2007). That is, before the early
1960s, with respect to most commodities, imports were regulated by the foreignexchange allocation system.
The primary purpose of the foreign exchange allocation system in Japan was tosecure the balance of payments and to stabilize the currency value. However, thissystem was also used as a tool for industrial policy (Ministry of International Trade andIndustry (MITI, 1991; Okazaki and Korenaga, 1999). The amount of foreign exchange
available for the importation of each commodity was determined ex ante by the foreignexchange budget, and furthermore, each firm was required to apply to the MITI for
foreign exchange allocation to import each commodity. The MITI utilized this systemfor various policy goals, including protection of domestic industries from international
competition, giving the strategic industries priority access to high-quality imported
equipment and inputs, promotion of exports, and regulation of domestic competition. In
the context of this paper, it is particularly important that the allocation of the foreignexchange budget to each commodity effectively determined the maximum importquantity of the commodity, given its import price. In other words, the foreign exchange
allocation system worked as a de facto import quota system and was used to protect
domestic industries from international competition. 4 From the late 1950s, theInternational Monetary Fund (IMF), General Agreement on Tariffs and Trade (GATT),and foreign countries requested the Japanese government to abolish the regulation offoreign exchange, and as we will see below, in the 1960s, the foreign exchange
allocation system was reduced in size and finally abolished. Given the role of the
4

In this paper, therefore, “import quota” means the de facto import quota through the foreignexchange allocation system.

2

foreign exchange allocation as a de facto import quota system, its abolition meant asubstantial change in industrial policy. Furthermore, the MITI intended to improve theefficiency of industries by removing de facto import quotas from their products at theappropriate time.
This policy change in the 1960s, often called “trade liberalization,” has been regarded
as an epochal point in postwar Japanese economic history (Ito and Kiyono, 1988;
Nakakita, 1993). However, to our knowledge, only a few studies have systematicallyanalyzed the effects of this policy change. In this paper, we attempt such an analysis
using detailed industry-level data. 5 Whereas the policy change occurred over a
relatively short period, there were variations in the timing of the removal of the de facto
import quotas across commodities, and hence across industries. We exploit thesetime-series and cross-sectional variations within and across industries in assessing theeffects of the policy change. Furthermore, it is noteworthy that we can precisely identify
the timing of the quota removal for each commodity, using original government
documents. Moreover, this paper utilizes detailed industry-level data from the Census of
Manufactures, matching this with information on trade protection (i.e., tariff rates andimport quotas). This enables us to control for industry heterogeneity while covering the
majority of manufacturing industries. Controlling for tariff rates is particularly
important in assessing the effects of the policy change, because as we will see later, thegovernment intended to mitigate the expected negative impacts of de facto quota
removal on industries by raising tariff rates.
To examine the effects of quota removal, we follow the empirical framework of Head5

The effects of trade protection (or trade liberalization) are important issues not only in the literature
on international trade but also in the economic history literature. See, for example, Grant and Thille(2001), Irwin (2007), and Davis and Irwin (2008).

3and Ries (1999). Their study tested whether or not the observed trend in output per plant
and the number of plants are systematically related to tariff reductions in Canada, byanalyzing 230 industries. They found that output increased, while the number of
establishments decreased in the Canadian manufacturing sector after trade liberalization.
Their results indicate that a smaller number of establishments were able to produce at alarger scale after trade liberalization, which they called the “rationalization effect.” Our
study also investigates whether such effects were evident during the period 1960–1969
in Japan.
In the Japanese economic history literature, it is widely believed that the abolition of
the foreign exchange allocation system in the 1960s contributed significantly to thegrowth of manufacturing industries (Ito and Kiyono, 1988; Nakakita, 1993). We foundpositive effects of tariff protection and import quota removal on real value added andlabor productivity in the OLS estimates. However, such positive effects disappeared
once we controlled for the industry-specific time trend as well as the industry and year
fixed effects. Our results imply that this belief may be attributable to a lack of control interms of unobserved industry heterogeneity and macroeconomic shocks.
We also find that, on the one hand, the removal of de facto import quotas had
significantly negative effects on real output, real output per establishment, andemployment. On the other hand, for those industries that removed import quotas, tariff
protection was effective in maintaining real output and employment. However, this does
not necessarily mean the success of industrial policy change because neither tariff
protection nor the removal of quotas contributed to productivity growth. In that sense,
the industrial policy change had limited effects.
4

The rest of this paper is organized as follows. Section 2 reviews the removal ofimport quotas in Japan. Section 3 explains the empirical methodology and data. Section
4 presents the estimation results. Conclusions are presented in Section 5.
2.

The Removal of Import Quotas in Postwar Japan: A Historical Review

This paper examines Japan’s dramatic move from import quota protection to tariff
protection in the postwar period. This section argues that the case of postwar Japan
provides an excellent opportunity to explore the effects of quota removal.
After direct control of international trade by the government ceased in 1949 as a partof the “Dodge Plan,” the Japanese government regulated trade indirectly through theallocation of foreign exchange. 6 That is, all the foreign exchange was held by either thegovernment, the Bank of Japan (BOJ), or foreign exchange banks, and the government
drew up a “foreign exchange budget” to allocate foreign exchange every six months.
The foreign exchange budget was composed of the budget for service imports and thatfor commodity imports, which in turn was composed of the budget for “foreignexchange allocation system goods” (hereafter, FA goods) and that for “automatic
approval system goods” (hereafter, AA goods). 7
Whereas imports of AA goods were not checked within the total limit of the AA
budget, an FA budget was allocated to each good (i.e., to coal, steel, etc.). Hence, for FA
6

The description of foreign exchange regulations below relies on Naoi and Okazaki (2013) andOkazaki and Korenaga (1999). See also Inuta (2000) pp. 38–53.
7
The cotton-spinning industry is a typical industry that experienced a shift from FA goods to AA
goods. Cotton yarn and raw cotton were classified as FA goods in the 1950s. “Cotton-spinningindustry was not only protected from international competition through foreign exchange allocation
for cotton yarn, but also domestic competition was also regulated by the MITI through foreignexchange allocations for raw cotton” (Kiyota and Okazaki, 2010, p. 590). From April 1961, raw
cotton was classified as an AA good, implying that the importation of raw cotton was liberalized. As
a result, government intervention in the cotton-spinning industry by means of foreign exchange
allocations was discontinued.

5

goods, the upper limit of the import quantity was determined by the foreign exchange
budget, given the import price. This implies that there was a de facto import quota for
FA goods, and the MITI utilized this system for protecting domestic industries frominternational competition. For instance, in the early 1950s, the MITI decided to promote
the automobile industry, which was in its infancy, and in accordance with this policy,
the MITI reduced the foreign exchange budget for importing foreign automobiles toprotect the Japanese automobile industry (Jiji Press, 1956; Long-Term Credit Bank ofJapan, 1972).
Furthermore, to import FA goods, a firm had to apply to the MITI to receive anallotment of foreign exchange ex ante. In other words, the MITI had the authority tocontrol each firm’s imports of FA goods. In this sense, the classification of FA goods
and AA goods was crucial. The MITI determined the classification for all import goods
and made an announcement whenever it was revised (Import Proclamation, Yunyu
Kohyo). De facto import quotas on each FA good by the foreign exchange allocation
system generated rent by raising domestic prices. This rent was captured by the firmsthat were allocated foreign exchange for importing these goods, as well as the domestic
producers of the goods, to the extent that the import quantity was restricted. Usually,
foreign exchange for importing a certain good was allocated to the trading companies
that would import it and to the firms that would use it as an input (Okazaki andKorenaga, 1999). Because the foreign exchange allocation system was utilized for theseindustrial policy goals including protection of domestic industries from international
competition, the abolition of this system was an important change in Japanese industrial
policy.
6

In the context of the international trade and finance regimes, this system was basedon Article 14 of the Agreement of the International Monetary Fund (IMF) and Article 8of the General Agreement on Tariffs and Trade (GATT), which allowed a member
country to adopt “transitional arrangements” for imposing restrictions on foreignexchange and international trade. Japan had been allowed to utilize this arrangement
because it participated in the IMF and GATT; however, as the Japanese economy
recovered from the war and quickly grew, which helped to resolve the persistent deficit
in its balance of payments in the late 1950s, the IMF and foreign countries began torequest that Japan liberalize international trade (MITI, 1991, pp. 171–173; Customs andTariff Bureau, Ministry of Finance (MOF), 1972, pp. 314–323).
Under these circumstances, the Japanese government approved the “Outline of thePlan for Trade and Foreign Exchange Liberalization” (“Boeki Kawase Jiyuka Keikaku
Taiko”—hereafter, Outline), wherein it committed to raising the “liberalization rate” to80 percent within three years. The liberalization rate is the percentage of imports of AA
and “automatic foreign exchange allocation” goods (hereafter, AFA goods) to total
imports, which was 41 percent in July 1960. AFA goods is a category that was
introduced in 1960. When a firm applied to the MITI for a foreign exchange allocation
to import goods in this category, foreign exchange was allocated automatically, andhence trade of AFA goods was regarded as “liberalized” (MITI, 1961, p. 51; Customs
and Tariff Bureau, MOF, 1972, p. 327).
It is notable that in addition to the pressure being applied from overseas, the MITI
also took account of the positive effects of the abolition of the foreign exchange
allocation system. In the 1960 issue of Tsusho Hakusho (White Paper on International7

Trade), the MITI wrote: “Although protecting domestic industries by restricting imports
would contribute to promoting their growth transiently, it is not the right way to enhancethe efficiency and competitiveness of the domestic industries to the international
standard” (MITI, 1960, p. 99). In this sense, for the MITI, while quotas were imposed toprotect an industry during its infancy, removing de facto import quotas from acommodity at the appropriate time was a type of industrial policy that was designed to
improve the efficiency of the producing industry.
In response to continuing pressure from the IMF and the abovementioned policy of
the MITI, the Japanese government swiftly changed the classification of certain goods
from the FA category to the AA and AFA categories in 1961 and 1962, and consequently
the foreign exchange liberalization rate increased to almost 90 percent by the end of
1962 (Figure 1). Given these changes, in April 1964, the foreign exchange budget
system was abolished, and for the remaining FA commodities, the import quota system
was introduced (Japan Tariff Association, 1964, pp. 139–140).
=== Figure 1 ===While the removal of import quotas proceeded swiftly, it is notable that this process
was different from what the literature in economics refers to as trade liberalization. Thatis, the Outline pointed out the need for revision of tariffs as well as the removal ofimport quotas. It stated: “As direct regulations on import quantities are mitigated, therole of tariffs for industrial policy becomes more important,” and “Because many of thecommodities to be liberalized need tariff protection, we will revise the Tariff Rate Law

8from the standpoint of boosting liberalization.” 8 Following the recovery of currency
convertibility by European countries in 1958, the Japanese government and business
community became interested in reviewing the tariff system. Under the de facto importquotas of the foreign exchange allocation system, the role of tariffs in the protectedindustries was limited; however, as this system was not expected to continue, they
sought an alternative protective measure.
In April 1960, MOF consulted with the Tariff Rate Deliberation Council (Kanzeiritsu
Shingikai) about changes to the tariff system to cope with the removal of import quotas,
given the changes in Japan’s industrial structure. The Council sent a report to the
Minister of Finance in December 1960, and a new tariff system was introduced in June
1961 based on that report. This was the first major revision of the tariff system since therevision in 1951, when Japan was still under Allied occupation (Asai, 2007, pp. 42–46;
Customs and Tariff Bureau, MOF, 1972, pp. 450–451, p. 469). The basic purpose of the1961 revision was as follows:
1) protection of growing infant industries from the standpoint of the industrial structure
policy;2) protection of stagnating and declining industries to support changes in employment
patterns; and3) minimization of tariffs for other industries to promote expansion of trade, industry
rationalization, and consumer benefits.
Of a total of 2,233 commodities listed in the tariff table, 251 had their tariff rates
8

Outline of the Plan for Trade and Foreign Exchange Liberalization (Boeki Kawase Jiyuka Keikaku
Taiko, printed by the Economic Planning Agency (1960, pp. 17–18). Furthermore, in the 1960 issue ofthe White Paper on International Trade, the MITI noted: “With the abolition of quantitative import
restrictions, the industrial policy role of tariffs, namely protecting developing industries important to
the national economy, becomes particularly important” (MITI, 1961, pp. 64–65).

9

increased, 386 had their rates decreased and 1,596 commodities were unchanged(Customs and Tariff Bureau, MOF, 1972, pp. 468–469). 9 As stated above, the MITI
intended to improve the efficiency of domestic industries by removing de facto importquotas from a commodity at the appropriate time. The revision of tariffs means that the
MITI’s goal was not fully achieved because of both political and economic reasons.
Figure 1 indicates two types of average tariff rates: the tariff revenue divided by total
imports and the tariff revenue divided by the imports of commodities with tariffs. It canbe seen that there was no substantial change in 1961 or 1962. In fact, the increase in1959 is much clearer. Most of the increase in the average tariff rate in 1959 was becauseof the increase in the sugar tariff. In that year, the sugar tariff was increased from 14.0
yen/kg to 41.5 yen/kg, and the ratio of sugar tariff revenue to the import volume ofcommodities with tariffs was 4.4 and 7.7 in 1958 and 1959, respectively. 10 The 1961
tariff changes did not have a visible impact on the average tariff rate, but it is possiblethat tariff rates were altered at the detailed industry level to mitigate the impacts of
quota removal, as expressed in the Outline in 1960. We will examine this issue in thenext section.

9

According to the GATT agreement, in case a member country intended to increase the tariff rate ona certain commodity, it should inform all the member countries and negotiate with the interested
countries, in advance. Hence, before the revision of tariffs in 1961, the Japanese government
negotiated with the U.S. and West Germany to have their agreements (Customs and Tariff Bureau,
MOF, 1972, pp.496-497).
10
The data on sugar tariff revenue are taken from the Tax Bureau of the MOF (1961); the data on theimport volume of commodities with tariffs are taken from the MOF’s Monthly Bulletin of Financial
Statistics, vol. 144, 1963, p. 80.

10

3.

Methodology and Data

3.1. Methodology
The analysis used in this paper follows that of Head and Ries (1999). To examine theeffects of quota removal, we include an import quota removal dummy that equals 1
when and after the import quota was removed and 0 otherwise. 11 The regression
equation is as follows:
ln𝑍𝑍𝑖𝑖𝑖𝑖 = 𝛼𝛼𝑖𝑖 + 𝛽𝛽𝑡𝑡 + 𝛾𝛾[ln(1 + 𝜏𝜏𝑖𝑖𝑖𝑖 )] + 𝜆𝜆𝑑𝑑𝑖𝑖𝑖𝑖 + 𝜂𝜂[ln(1 + 𝜏𝜏𝑖𝑖𝑖𝑖 ) × 𝑑𝑑𝑖𝑖𝑖𝑖 ] + 𝛼𝛼𝑖𝑖 × 𝑡𝑡 + 𝜖𝜖𝑖𝑖𝑖𝑖 ,(1)

where 𝑖𝑖 and 𝑡𝑡 represent the industry and year, respectively; 𝑍𝑍𝑖𝑖𝑖𝑖 is the performance ofindustry; 𝛼𝛼𝑖𝑖 and 𝛽𝛽𝑡𝑡 are industry and year fixed effects, respectively; 𝜏𝜏𝑖𝑖𝑖𝑖 is theindustry tariff rate; 𝑑𝑑𝑖𝑖𝑖𝑖 is a quota removal dummy; 𝛼𝛼𝑖𝑖 × 𝑡𝑡 is the industry-specific timetrend; and 𝜖𝜖𝑖𝑖𝑖𝑖 is the error term. The interaction term ln(1 + 𝜏𝜏𝑖𝑖𝑖𝑖 ) × 𝑑𝑑𝑖𝑖𝑖𝑖 is included tocontrol for the composite effect of tariffs and quotas.

Note that trade policy itself could be determined endogenously. For example, thedeclining industries may have high tariff levels. Guadalupe and Wulf (2010) addressed
this concern by controlling for industry-specific trends. Therefore, the potential
endogeneity biases can be absorbed by the industry secular trends 𝛼𝛼𝑖𝑖 × 𝑡𝑡. 12
11

For the performance of industry 𝑍𝑍𝑖𝑖𝑖𝑖 , following Head and Ries (1999), we utilize

We utilize a dummy variable to capture the effects of the removal of import quotas because of thelimited availability of import quantity data.
12
To address the issue of endogeneity, we also tested the system using GMM estimation. However,the Sargan test rejected the validity of the overidentifying restrictions for all outcome variables. The
presence of second-order serial correlation in the first-differenced residuals was also rejected forsome outcome variables. Furthermore, although we tested several specifications, the sign andsignificance levels of the coefficients were sensitive to the specifications. Because of the difficulty infinding appropriate instrument variables, as a second-best strategy, this paper addressed the issue ofendogeneity, following Guadalupe and Wulf (2010). A more rigorous examination of endogeneity isleft for future research.

11

output per establishment and the number of establishments. We also use output(shipment), value added, employment, and labor productivity. 13 The parameters ofinterest are 𝛾𝛾, 𝜆𝜆, and 𝜂𝜂, namely the coefficients of the two industrial policy variables(tariffs and the import quota dummy) and the composite of these two measures.

As we include industry fixed effects, the effects of industrial policy are estimated byusing time-series variation. The year dummies capture influences common to allindustries.
3.2. Data
Sample selection
We collected data on the number of establishments, the number of employees,
shipments, and the value added of manufacturing industries at the four-digit level for theperiod from 1960 to 1969 from the industry volume of the Census of Manufactures(Kogyo Tokei Hyo). The Census of Manufactures over this period has data on plants
with fewer than 10 employees as well as plants with 10 or more employees, but for
many four-digit industries, the data on plants with fewer than 10 employees are
censored because of the small number of such plants. Hence, we use the data on plants
with 10 or more employees.
At the four-digit level, there are 558 manufacturing industries. Of these, 138
industries are excluded because of incomplete information on employment, shipments
and value added from the census. 14 Next, using the commodity volumes of the Census
13

All variables are at the industry level. Although the use of firm- or establishment-level data may be
more desirable, such data are not available for this period.
14
The Census of Manufactures conceals the data for cases in which there were fewer than threeestablishments in an industry for reasons of confidentiality.

12

of Manufacturing, we identified the main product of each industry. We exclude from thesample 45 industries whose main products cannot be identified. In addition, thoseindustries whose quota removal information (two industries), price data (131 industries),
or tariff rates (five industries) are not available are excluded. We further exclude 10
industries whose growth rate of shipment, the number of establishments, perestablishment shipmentt, value added, employment, or labor productivity is greater than
150 percent or smaller than −150 percent (in log values) to remove outliers (i.e.,|ln(𝑍𝑍𝑡𝑡 ⁄𝑍𝑍𝑡𝑡−1 )| > 1.5|). Consequently, there remain 227 industries in our sample. Our
sample size is comparable to that of Head and Ries (1999) (230 industries).
Import quota removal
As stated in Section 2, those goods classified in the FA category were subject to de facto
import quotas, while AA and AFA goods were not subject to such quantitative
restrictions. Hence, here we examine the impact of removing quantitative importregulations by focusing on events in which a good moved from the FA category to the
AA or AFA category.
Then, we explored into which category (AA/AFA/FA) the main product of eachindustry was classified at the end of each year from 1960 to 1969. The category
information was taken from the following official sources. As stated in the previous
section, the classification of each commodity in terms of the AA/AFA/FA categories
was obtained from “Import Proclamation” (Yunyu Kohyo) by the MITI, which was madepublic in the Official Bulletin of the MITI (Tsusansho Koho). After April 1964, the list ofcommodities subject to the import quota system was also announced in the Official
Bulletin of the MITI. We examined every issue of the Official Bulletin of the MITI from13

1960 to 1969, as well as the Research Institute of International Trade and Industry(1965–69) to identify the category of each commodity at the end of each year.
Tariff rates
As explained in the previous section, the official publications from the MOF and the
MITI stated that the tariff system was revised to mitigate the impact of removing
quantitative restrictions in 1961 and 1962. To examine the effects of both tariff andquota removal, we collected data on the tariff rates on the main products of the 227
industries, as outlined above, from the 1961–1969 issues of Customs Tariff Schedules ofJapan (Japan Tariff Association 1961; Japan Tariff Association 1962–1969). The tariff
rates here are the MFN tariff rates in the customs tariff schedule. In this paper, we focus
on ln(1 + 𝜏𝜏𝑖𝑖𝑖𝑖 ) rather than tariff rate 𝜏𝜏𝑖𝑖𝑖𝑖 because ln(1 + 𝜏𝜏𝑖𝑖𝑖𝑖 ) indicates the difference
between domestic and foreign price levels.
Industry performance
Following Head and Ries (1999), we measure industry performance by real output, thenumber of establishments, and real output per establishment. Real output is defined as
shipments divided by the wholesale price index from the BOJ. Shipments and thewholesale price index were obtained from the MITI (1960–1969) and the BOJ (1987),
respectively. We linked the BOJ wholesale price index with a 1952 base to that with a1960 base in 1960. Both the 1952 base index and the 1960 base index cover the priceindices of 209 commodities. From the commodity volume of the MITI (1960–1969), we
identified the commodities with the largest shipments in 1960 for each industry, andused the price index of that commodity as the deflator for the industry.
14

In addition to these industry performance variables, we utilize labor productivity as
an additional performance variable. 15 Labor productivity is defined as real value added
divided by the number of workers. Real value added, in turn, is defined as nominal
value added divided by the sectoral value-added deflator. Nominal value added andvalue-added deflators are obtained from the MITI (1960–1969) and the Cabinet Office(2001), respectively.
3.3. Descriptive analysis
Figure 2 shows the number of establishments, shipments (real output), and real output
per establishment from 1960 to 1969. 16 While the volume of real output grew steadily,
the number of establishments was almost constant throughout the period. As a result, thereal output per establishment increased. One notable finding is that there was norationalization effect. Head and Ries (1999) found that a smaller number of
establishments produced on a larger scale after trade liberalization, which they called
the rationalization effect. Such an effect was not confirmed during the period 1960–
1969 in Japan.
=== Figure 2 ===Panel A in Table 1 shows the number of industries in our sample that removed importquotas. It can be seen that eight out of 227 industries removed import quotas before
1961. Between 1961 and 1962, 163 industries removed import quotas. Between 1963
and 1969, an additional 31 industries removed quotas. Before 1970, therefore, 202 out
15

Information on the capital stock is not available. Therefore, it is impossible for us to estimate totalfactor productivity.
16
In Table A1, we present the average of the industry performance measures by year. Table A2 shows
the correlation matrix of the performance and policy variables.

15

of 227 industries removed quotas. The remaining 25 industries did not remove quotas
throughout the period. In summary, the years in which industries removed import quotas
were concentrated in the early 1960s, when the Japanese government promoted quota
removal in accordance with the Outline announced in 1960.
=== Table 1, Panel A ===Panel B in Table 1 shows the relationship between the import quota removal andchanges in tariff rates. The average change in tariff rates when the quota was removed is
0.06 percent, which is slightly higher than for other years (−0.22 percent). To test theequality of these figures, we conduct t-tests with unequal variances. The null hypothesisthat these means are equal is rejected at the five percent level (t = −2.38 and p-value =0.018). The results seem to suggest that the Japanese government maintained or raised
tariff rates when the import quotas were removed.
=== Table 1, Panel B ===Table 2 shows the average of industry performance before and after quota removal. 17
It can be seen that the averages of real output and the number of establishments
increased after the removal of the import quotas, whereas average output perestablishment remained almost constant. Similarly, real value added, employment, andlabor productivity all increased. On the other hand, tariff rates declined. In spite of theincreases in these variables after the quota removal, the growth rate did not show any
clear pattern. Nonetheless, the growth rate of industry performance continued to be

17

Note that the total number of industries that removed import quotas is 194 (not 202) because six
industries removed quotas before 1961.

16

positive before and after the removal of the import quotas.
=== Table 2 ===One may argue that these results show the positive effects of quota removal. However,Table 2 presents a simple comparison before and after quota removal, and thus does notcontrol for any industry- and year-specific effects. Noting that the period of quota
removal coincided with the age of high economic growth in Japan, these results may
simply reflect factors other than the removal of import quotas. The next section
investigates the effects of quota removal in detail.
4.

Results

4.1. Preliminary analysis
We begin with the simple ordinary least squares (OLS) results. Table 3 presents the OLS
estimates of equation (1), excluding industry-specific trends and year and industry fixed
effects. The results indicate that tariff rates have significantly positive effects on allindustry performance measures. The removal of import quotas also has positive effects
on real value added and labor productivity. The interaction term between tariff rate andquota removal dummy is significantly positive for employment, whereas it issignificantly negative for labor productivity. These results suggest that for industries
that removed import quotas, protection by tariff was effective in maintaining theemployment level. However, real output did not increase significantly. As a result, theinteraction term indicates significantly negative coefficients for labor productivity.
=== Table 3 ===17

The result is generally consistent with the findings of the previous studies that argued
that “trade liberalization” or removal of de facto import quotas in the 1960s in Japan
had significantly positive effects on manufacturing growth (Ito and Kiyono, 1988;
Nakakita, 1993). Note, however, that the analysis of the previous studies was mainly
based on the descriptive analysis of the data. The analysis did not control for suchfactors as unobserved industry and year heterogeneity. 18 We also examined how
sensitive the results are to the additional control variables and found that once weintroduced year fixed effects, the positive effects of the removal of import quotas
became negative. Besides, industry performance can be heterogeneous across industries.
The next section controls for such heterogeneity.
4.2. Baseline results
Table 4 contains the estimation results of equation (1). There are four notable findings.
First, the quota removal dummy indicates statistically negative coefficients for real
output, real output per establishment, and employment. It also indicates a negative
coefficient for real value added, although it is insignificant. The results suggest that theremoval of import quotas increased the competition from imports, which results in the
declines in real output and employment. Unlike the case of Canadian manufacturing(Head and Ries, 1999), however, the number of establishments did not decline. As aresult, real output per establishment remained unchanged after the quota removal. In
other words, the rationalization effect was not found in our sample.
=== Table 4 ===18

We also examined how sensitive the results are to the additional control variables. The results arereported in Table A3.

18

Second, none of the industry performance measures is systematically related to thetariff rates. This result implies that on average, the protection by tariff was notnecessarily effective. Third, however, the coefficient of the interaction term between
tariff and quota removal dummy is significantly positive for real output, real output perestablishment, real value added, and employment. This result implies that for industries
that removed import quotas, protection by tariff was effective in maintaining real output
and employment levels. This result may imply that the protection by the MITI shiftedfrom import quotas to tariffs strategically in order to maintain the output andemployment of the industries.
Fourth, however, this result does not necessarily mean the success of the Japaneseindustrial policy change because neither tariff protection nor the removal of quotas had
significant effects on labor productivity. Industrial policy change did not have any
effects on industry efficiency. In that sense, these results together suggest that the effects
of industrial policy were limited.
We found positive effects of tariff protection and import quota removal on real value
added and labor productivity in the OLS estimates in Table 3. Such positive effects
disappeared once we controlled for the industry-specific time trend as well as theindustry and year fixed effects. In the Japanese economic history literature, it is widelybelieved that the industrial policy change in the 1960s contributed significantly to thegrowth of manufacturing industries. However, our results imply that such belief may be
attributable to a lack of control in terms of unobserved industry heterogeneity andmacroeconomic shocks. Noting that this result in the literature is mainly based on
descriptive analyses of the data, our results suggest that the effects of Japanese19industrial policy should be reexamined using a standard econometric framework. Thisfinding in the literature may be the result of an inappropriate analysis. 19
4.3. Dynamic effects
A related question is whether the removal of the import quotas affects the growth rate,
because the effects of policy change are sometimes dynamic rather than static. 20 To
answer this question, we run the following regression:
Δln𝑍𝑍𝑖𝑖𝑖𝑖 = 𝛼𝛼𝑖𝑖 + 𝛽𝛽𝑡𝑡 + 𝛾𝛾[ln(1 + 𝜏𝜏𝑖𝑖𝑖𝑖 )] + 𝜆𝜆𝑑𝑑𝑖𝑖𝑖𝑖 + 𝜂𝜂[ln(1 + 𝜏𝜏𝑖𝑖𝑖𝑖 ) × 𝑑𝑑𝑖𝑖𝑖𝑖 ] + 𝜖𝜖𝑖𝑖𝑖𝑖,𝑡𝑡+1 ,(2)

where Δ indicates first differences between years 𝑡𝑡 and 𝑡𝑡 + 1 . The difference

between equation (2) and the baseline regression (i.e., equation (1)) is that theleft-hand-side variable is the growth rate of industry performance in equation (2). 21
Table 5 presents the estimation results of equation (2). Table 5 indicates that none of thepolicy variables has significant coefficients. These results suggest that the growth ofindustry performance was not accelerated by these policy measures.
=== Table 5 ===5.

Concluding Remarks

This paper has attempted to provide a systematic analysis of the effects of the industrial
policy change in Japan in the 1960s, using a set of detailed industry-level data. Most of
19

As robustness checks, we examine the dyssynchronous effects of the quota removal, which are
discussed in Appendix 1 of the working paper version of our paper (Kiyota and Okazaki, 2015). We
also examined the difference in the effect of quota removal between earlier and later periods, which is
discussed in Appendix 2 of Kiyota and Okazaki (2015).
20
See, for example, Kiyota (2012) for a survey.
21
In equation (4), 𝛼𝛼𝑖𝑖 now captures the preexisting trends in productivity of the industries because
the left-hand-side variable is the growth rate. Industry-specific time trends are excluded,
accordingly.

20

the industries were protected from international competition by de facto import quotas
by the foreign exchange allocation system until the late 1950s, when the pressure
intensified from overseas to liberalize trade. Given this pressure, by removing importquotas, the MITI intended to improve the efficiency of those industries that were
expected to progress beyond infancy. In this sense, removing import quotas was a formof industrial policy.
To examine the effects of industrial policy change, we utilized a panel of 227
Japanese manufacturing industries between 1960 and 1969. We find that on the one
hand, the removal of quotas had significantly negative effects on real output, real output
per establishment, and employment. On the other hand, for those industries thatremoved import quotas, tariff protection was effective in maintaining real output andemployment. However, this does not necessarily mean the success of industrial policychange because neither tariff protection nor the removal of quotas contributed to the
productivity growth. Furthermore, the rationalization effect was not found in our
sample.
In the Japanese economic history literature, it is widely believed that the industrial
policy change in the 1960s contributed significantly to the growth of manufacturingindustries. However, our results imply that this was not necessarily true in two respects.
First, industrial policy change in the 1960s does not necessarily mean tradeliberalization because protection was maintained, shifting from import quotas to tariffs.
Second, neither tariffs nor the removal of import quotas affected the productivity or thegrowth of other industry performance measures. In that sense, the industrial policychange had limited effects.
21Caveats of this paper worth mentioning are as follows. First, while this paper focusedon labor productivity, it is more desirable to utilize total factor productivity (TFP). Thisis because TFP takes factor inputs other than labor into account. As Kiyota and Okazaki(2005, 2010) found, Japanese industrial policy generally had positive effects on laborproductivity but insignificant effects on TFP. The effects of quota removal on TFP could
differ from those on labor productivity.
Second, there are some limitations stemming from data availability. This paper
utilized industry-level data because of the limited availability of firm- or
establishment-level datain the 1960s. However, recent studies on industrial policychange and productivity utilize firm- or establishment-level data. The use of suchmicro-level data enables us to control for unobserved firm or establishment
heterogeneity. The effects of quota removal may be heterogeneous between large andsmall firms and/or between productive and less productive firms. Furthermore, we useddata on plants with 10 or more employees. It is possible that industrial policy change
had positive or negative effects with respect to small plants. Concerning the industrial
policy variable, we used a dichotomous variable indicating whether a certain
commodity was classified as an FA good or not. However, it is possible that before theclassification of a commodity was changed to AFA/AA, the allocation of foreignexchange to the commodity was increased sufficiently. We did not take account of thispossibility in this paper.
Third, our analysis did not consider the effects of the decline in the price ofintermediate inputs or interindustry effects. Recent studies such as those of Amiti andKonings (2007), Fernandes (2007), and Topalova and Khandelwal (2001) found22

significant positive effects from the decline in input tariffs on firm productivity. Thisimplies that the effects of industrial policy could appear through interindustry linkages.
However, to control for such effects, we need detailed data on intermediate inputs,
which are currently unavailable. To address these issues, it is essential that the quality
and coverage of the historical data be improved and expanded.
References
Amiti, Mary and Jozef Konings (2007) “Trade Liberalization, Intermediate Inputs, andProductivity: Evidence from Indonesia,” American Economic Review, 97(5):1611-1638.
Asai, Yoshio (2007) “IMF 8 Jou-koku Iko to Boueki Kawase Jiyuka: IMF to Nihon,
1958-64, Part 2,” Seijo Daigaku Keizai Kenkyujo Hokoku (Report of Economic
Research Institute of Seijo University), 46. (In Japanese)
Bank of Japan (1987) Meiji iko Oroshiuri Bukka Shisu Tokei: 100-shunen Kinen Shiro(Hundred-Year Statistics of Wholesale Price Indexes in Japan), Tokyo: Nihon
Shin’yo Chosa Kabushiki Gaisha (In Japanese).
Beason, Richard and David E. Weinstein (1996) “Growth, Economies of Scale, andTargeting in Japan (1955-1990),” Review of Economics and Statistics, 78(2):286-295.
Cabinet Office (2001) Kokumin Keizai Keisan Hokoku: Choki Sokyu Suikei (Report on
National Accounts from 1955 to 1998), Tokyo: Cabinet Office (in Japanese).
Customs and Tariff Bureau, Ministry of Finance ed. (1972) Zeikan Hyaku-nen Shi (100Years History of Customs), Vol.2, Tokyo: Japan Tariff Association. (InJapanese)23Davis, Joseph H. and Douglas Irwin (2008) “The Antebellum U.S. Iron Industry:Domestic Production and Foreign Competition,” Explorations in Economic
History, 45(3): 254-269.
Economic Planning Agency ed. (1960) Boeki Kawase Jiyuka Keikaku Taiko (Outline of
the Plan for Trade and Foreign Exchange Liberalization), printed by the
Economic Planning Agency (In Japanese)
Fernandes, Ana M. (2007) “Trade Policy, Trade Volumes and Plant-level Productivity in
Colombian Manufacturing Industries,” Journal of International Economics,
71(1): 52-71.
Grant, Hugh and Henry Thille (2001) “Tariffs, Strategy, and Structure: Competition and
Collusion in the Ontario Petroleum Industry, 1870-1880,” Journal of Economic
History, 61(2): 390-413.
Guadalupe, Maria and Julie Wulf (2010) “The Flattering Firm and Product Market
Competition: The Effect of Trade Liberalization on Corporate Hierarchies,”
American Economic Journal: Applied Economics, 2(4): 105-127.
Head, Keith and John Ries (1999) “Rationalization Effects of Tariff Reductions,” Journalof International Economics,” 47(2): 295-320.
Inuta, Akira (2000) Wagakuni Sengo no Gaikoku Kawase Kanri Seisaku to Choki Tanki
Shihon Torihiki Kisei no Kanwa (Foreign Exchange Administration Policy, andDeregulation of Long-term and Short-term Capital Transactions), Tokyo:
Chuokoron Jigyo Shuppan. (In Japanese)
Irwin, Douglas A. (2007) “Tariff Incidence in America’s Gilded Age,” Journal of
Economic History, 67(3): 582-607.
24

Ito, Motoshige and Kazuharu Kiyono (1988) “Foreign Trade and Direct Investment” inIndustrial Policy of Japan, 155-181, edited by Ryutaro Komiya, Masahiro
Okuno-Fujiwara and Kotaro Suzumura, San Diego, CA: Academic Press.
Japan Tariff Association (1961) Jikko Yunyu Zeiritsu Hyo (Customs Tariff Schedules ofJapan), Tokyo: Japan Tariff Association (In Japanese).
Japan Tariff Association (1962-69) Jikko Kanzeiritsu Hyo (Customs Tariff Schedules ofJapan), Tokyo: Japan Tariff Association (In Japanese).
Japan Tariff Association (1964) Boeki Nenkan (Yearbook of International Trade), 1964
issue, Tokyo: Japan Tariff Association (In Japanese)
Jiji Press (1956) Jiji Nenkan (Jiji Yearbook), 1956 issue, Tokyo: Jiji Press (In Japanese)
Johnson, Charmers (1982) MITI and the Japanese Miracle: The Growth of Industrial
Policy, 1925-1975, Stanford, California: Stanford University Press
Kiyota, Kozo (2012) “Trade Liberalization, Economic Growth, and Income Distribution
in A Multiple-cone Neoclassical Growth Model,” Oxford Economic Papers,
64(4): 655-674.
Kiyota, Kozo and Tetsuji Okazaki (2005) “Foreign Technology Acquisition Policy andFirm Performance in Japan, 1957-1970,” International Journal of Industrial
Organization, 23(7-8): 563-586.
Kiyota, Kozo and Tetsuji Okazaki (2010) “Industrial Policy Cuts Two Ways: Evidence
from Cotton Spinning Firms in Japan,” Journal of Law and Economics, 53(3):587-609.

25

Kiyota, Kozo and Tetsuji Okazaki (2015) “Assessing the Effects of Japanese Industrial
Policy Change during the 1960s,” Discussion Paper, CIRJE-F-992, Universityof Tokyo.
Komiya, Ryutaro, Masahiro Okuno-Fujiwara and Kotaro Suzumura eds. Industrial
Policy of Japan, San Diego, CA: Academic Press.
Long-Term Credit Bank of Japan ed., (1972) Shuyo Sangyo Sengo 25 Nen Shi (Postwar
25 Years History of Major Industries), Tokyo: Sangyo to Keizai. (In Japanese)
Ministry of International Trade and Industry (1960-69) Kogyo Tokei Hyo (Census of
Manufacturing), Tokyo: Ministry of International Trade and Industry. (InJapanese)
Ministry of International Trade and Industry (ed.) (1960) Tsuho Hakusho (White Paper
on International Trade), 1960 issue, Tokyo: Research Institute of International
Trade and Industry. (In Japanese)
Ministry of International Trade and Industry (ed.) (1961) Tsuho Hakusho (White Paper
on International Trade), 1961 issue, Tokyo: Research Institute of International
Trade and Industry. (In Japanese)
Ministry of International Trade and Industry (ed.) (1970) Tsusho Hakusho (White Paper
on International Trade), 1970 issue, Tokyo: Research Institute of International
Trade and Industry. (In Japanese)
Ministry of International Trade and Industry (ed.) (1991) Tsusho Sangyo Seisaku Shi(History of Japanese Trade and Industrial Policy), Vol. 8, Tokyo, ResearchInstitute of International Trade and Industry. (In Japanese)26

Nakakita, Toru (1993) “Boeki to Shihon no Jiyuuka Seisaku (Trade and Capital
Liberalization Policy),” in Sengo Nihon no Keizai Kaikaku – Shijyo to Seifu(Economic Reform in Postwar Japan: Market and Government), 275-306,
edited by Yutaka Kosai and Jyuro Teranishi, Tokyo: University of Tokyo Press.
(In Japanese)
Naoi, Megumi and Tetsuji Okazaki (2013) “Political Economy of Trade Liberalization:
The Case of Postwar Japan,” RIETI Discussion Paper Series, 13-E-090.
Noland, Marcus and Howard Pack (2003) Industrial Policy in an Era of Globalization:
Lessons from Asia, Washington, D.C.: Peterson Institute.
Okazaki, Tetsuji and Takafumi Korenaga (1999) “The Foreign Exchange Allocation
Policy in Postwar Japan: Its Institutional Framework and Function,” in Changes
in Exchange Rates in Rapidly Developing Countries, 311-337, edited by
Takatoshi Ito and Anne O. Krueger, Chicago and London: Chicago University
Press.
Okimoto, Daniel I. (1989) Between MITI and the Market: Japanese Industrial Policy forhigh Technology, Stanford, CA: Stanford University Press
Research Institute of International Trade and Industry (1965-69) Genko Yunyu Seido
Ichiran (Handbook of Present Import System), Tokyo: Research Institute ofInternational Trade and Industry. (In Japanese)
Rodrik, Dani (2008) “Normalizing Industrial Policy,” Commission on Growth andDevelopment Working Paper No.3, International Bank for Reconstruction andDevelopment and World Bank.

27

Tax Bureau, Ministry of Finance ed. (1961) Kanzei Sankosho (Reference Materials on
Tariffs), unpublished document. (In Japanese)
Topalova, Petia and Amit Khandelwal (2011) “Trade Liberalization and Firm
Productivity: The Case of India,” Review of Economics and Statistics, 93(3):995-1009.

28

Appendix 1. Dyssynchronous effects
One concern regarding the baseline analysis may be that producers knew the schedule
for quota removal in advance. In other words, producers may have started theadjustment in year 𝑡𝑡 given the information on tariff rates and the quota removalschedule in year 𝑡𝑡 + 1. As described in Section 2, the government announced theschedule for quota removal in 1960, and therefore this concern is relevant in our context.
If this is true, the regression equation (1) could not capture the effects of quota removal
because it assumes that the effects appear simultaneously (in year 𝑡𝑡).

To address this concern, this paper uses a forward lag for tariff rates and the quota

removal dummy:ln𝑍𝑍𝑖𝑖𝑖𝑖 = 𝛼𝛼𝑖𝑖 + 𝛽𝛽𝑡𝑡 + 𝛾𝛾[ln(1 + 𝜏𝜏𝑖𝑖𝑖𝑖+1 )] + 𝜆𝜆𝑑𝑑𝑖𝑖𝑖𝑖+1 + 𝜂𝜂[ln(1 + 𝜏𝜏𝑖𝑖𝑖𝑖+1 ) × 𝑑𝑑𝑖𝑖𝑖𝑖+1 ]+𝛼𝛼𝑖𝑖 × 𝑡𝑡 + 𝜖𝜖𝑖𝑖𝑖𝑖 .

(A1)Equation (A1) could also address the issue of reverse causality. The government
imposed higher tariffs in year 𝑡𝑡 + 1 if the industry was small in year 𝑡𝑡. In this case,𝛾𝛾 > 0.

Table A4 shows the estimation results of equation (A1). The results are similar to

those of the baseline model. The quota removal has significantly negative effects on real
output per establishment and employment. The interaction term between tariff rate andquota removal dummy indicates a significantly positive coefficient for real output perestablishment and real value added. The effects on labor productivity were insignificant.
These results together imply that producers knew the schedule for quota removal andthus had already started the adjustment in year 𝑡𝑡 + 1 although the efficiency did not29

improve.
=== Table A4 ===Another concern may be that the effects of quota removal disappeared immediately.
To address this concern, this paper uses a lag for the tariff rates and the quota removal
dummy:
ln𝑍𝑍𝑖𝑖𝑖𝑖 = 𝛼𝛼𝑖𝑖 + 𝛽𝛽𝑡𝑡 + 𝛾𝛾[ln(1 + 𝜏𝜏𝑖𝑖𝑖𝑖−1 )] + 𝜆𝜆𝑑𝑑𝑖𝑖𝑖𝑖−1 + 𝜂𝜂[ln(1 + 𝜏𝜏𝑖𝑖𝑖𝑖−1 ) × 𝑑𝑑𝑖𝑖𝑖𝑖−1 ]+𝛼𝛼𝑖𝑖 × 𝑡𝑡 + 𝜖𝜖𝑖𝑖𝑖𝑖 .

(A2)

Note that the independent variables are lagged by one year; data for the independent
variables used in this analysis are from 1960 to 1968. The period 1968–1969, when
average tariff rates declined, is not included in this analysis.
Table A5 shows the estimation results of equation (A2). The results are qualitatively
the same as those of the baseline model. That is, the removal of import quotas had
significantly negative effects on real output and real output per establishment. The
protection by tariff did not have significant effects on any industry performancemeasures. The interaction term between tariff and quota removal dummy shows
significantly positive coefficients for real output and real output per establishment.
Neither tariff protection nor quota removal affected the labor productivity. Together
with the baseline results, the effects of quota removal and tariff protection did notdisappear immediately for real output and real output per establishment, although laborproductivity was not affected by these policy measures.
=== Table A5 ===30

Appendix 2. Differences between the early and late 1960s
One may argue that the effects of quota removal are different between the early and late1960s. As shown in Table 2, the year in which industries removed import quotas varies
across industries: some industries removed import quotas before 1960, whereas others
did so in 1969. Industries whose performance was inferior to other industries might
have delayed the removal of import quotas. Therefore, the negative effects of quota
removal might have been limited in the late 1960s. To address this issue, we estimate
the following equation:𝑒𝑒𝑙𝑙ln𝑍𝑍𝑖𝑖𝑖𝑖 = 𝛼𝛼𝑖𝑖 + 𝛽𝛽𝑡𝑡 + 𝛾𝛾[ln(1 + 𝜏𝜏𝑖𝑖𝑖𝑖 )] + 𝜆𝜆𝑒𝑒 𝑑𝑑𝑖𝑖𝑖𝑖+ 𝜆𝜆𝑙𝑙 𝑑𝑑𝑖𝑖𝑖𝑖+ 𝜂𝜂[ln(1 + 𝜏𝜏𝑖𝑖𝑖𝑖 ) × 𝑑𝑑𝑖𝑖𝑖𝑖 ]+𝛼𝛼𝑖𝑖 × 𝑡𝑡 + 𝜖𝜖𝑖𝑖𝑖𝑖 .

(A3)

𝑒𝑒
where 𝑑𝑑𝑖𝑖𝑖𝑖
is a dummy variable that equals 1 if import quotas were removed before𝑙𝑙
is a dummy variable that equals 1 if import quotas were1966 and 0 otherwise, and 𝑑𝑑𝑖𝑖𝑖𝑖𝑒𝑒𝑙𝑙removed after 1966 and 0 otherwise (𝑑𝑑𝑖𝑖𝑖𝑖 = 𝑑𝑑𝑖𝑖𝑖𝑖+ 𝑑𝑑𝑖𝑖𝑡𝑡).

Table A6 presents the estimation results. The coefficient of quota removal dummy issignificantly negative in both the early and late 1960s for real output and employment.
It is also negative in both periods for real output per establishment, although it isinsignificant in the late 1960s. The effects of quota removal and tariff protection onlabor productivity were insignificant in both the early and late 1960s. The effects of theremoval of import quotas were, therefore, qualitatively the same between industries thatremoved quotas in the early 1960s and in the later 1960s.
=== Table A6 ===31

Figure 1. Average Tariff Rates and Foreign Exchange Liberalization Rate
Foreign exchange liberalization rate at the end of the year(%, leftt)
Tariff revenue / total imports (%, right)
Tariff revenue / imports of commodities with tariff (%, right)
100.0

25.0

90.0

20.0

80.0

15.0

70.0
10.0

60.0

5.0

50.0

0.0
1970

1969

1968

1967

1966

1965

1964

1963

1962

1961

1960

1959

1958

1957

1956

1955

40.0

Note: Foreign exchange libararization rate refers to the ratio of imports of AA and AFA goods tototal imports (Customs and Tariff Bureau, Ministry of Finance 1972, p.324). The information onliberalization rate is available from 1960 to 1969.
Sources: For tariff revenue and imports, Ministry of Finance (1972) Montyly Bulletin of Financial
Statistics , p.246. For liberalization ratio, MITI(1970), p.269.
Figure 2. Scale of Japanese Manufacturing, 1960-1969
Number of establishments
Total shipments
Shipments per Establishment

350

Index, 1960 = 100

300

250

200

150

Year

Source: MITI (1960-69).

1969

1968

1967

1966

1965

1964

1963

1962

1961

1960

100

Table 1. Import Quota and Tariff Rates
Panel A. Number of industries that removed import quota

Industries thatYear when import removed importquota wasquota
removedbefore 1961
1961
1962
1963
1964
1965
1966
1967
1968
1969

Cumulative
number ofindustries thatremoved importquota

Total number ofindustries

8
33
171
179
181
196
196
197
197
202

227
227
227
227
227
227
227
227
227
227

8
25
138
8
2
15
0
1
0
5

Share

0.04
0.15
0.75
0.79
0.80
0.86
0.86
0.87
0.87
0.89

Panel B. Import quota removal and changes in tariff rates

Quota removal
between years t-1
and t
No
Yes

Changes in tariff rates between years t-1 and tN

MeanStandard Deviation

1849
194

-0.00220.0006

0.000
0.001

Note: The year when import quota is removed defined as the year when the protection by a defacto import quota through the foreign exchange allocation system was removed. Tariff rates areln(1+tariff rate).
Source: MITI (1960-1969).

Table 2. Summary Statistics: Before and After the Removal of Import Quota
Level
BeforeAfter
Real output[Q]
Number of establishments[N]
Output per establishment[q = Q/N]
Real value-added[VA]
Employment[L]
Labor productivity[lp = VA/L]
Tariff rates

81,142112,968(117,385) (197,785)
350
526
(557)
(1,106)
1,056
1,055(2,434)(4,178)23,94939,663(33,027) (68,737)
21,727
29,169(25,871) (41,512)
1.160
1.389
(1.067)(1.071)0.168
0.147(0.089)(0.074)Growth rate
BeforeAfter
0.122(0.182)0.007(0.133)0.115(0.186)0.134(0.242)0.026(0.153)0.108(0.189)0.001(0.029)0.106(0.198)0.001(0.130)0.105(0.181)0.122(0.225)0.006(0.153)0.116(0.171)-0.003(0.016)

Note: Average figures are reported. Growth rates are annual average growth rates.
Figures in parentheses are standard deviations. Tariff rates are ln(1+tariff). The growthof tariff rates indicates the changes in ln(1+tariff rate) between years t-2 and t.
Source: See Table 1.

Table 3. OLS Results
(1)
lnQ

(2)
lnN

(3)
lnq

Quota removal dummy(year t)Tariff rates(year t)Tariff rates * Quota
removal dummy (year t)-0.000(0.152)2.672***(0.576)1.180(0.784)0.093(0.145)1.490**(0.586)0.994(0.819)-0.094(0.154)
1.182*(0.688)0.186(0.883)

Industry fixed effectYear fixed effectIndustry-specific time trend
Observations
R-squared
Number of industries

No
No
No
2,270
0.032
227

No
No
No
2,270
0.017
227

No
No
No
2,270
0.005
227

(4)
lnVA

(5)
lnL

(6)
lnlp

0.281**-0.079 0.360***(0.143)(0.125)(0.066)2.569*** 1.818*** 0.751**(0.522)(0.446)(0.298)0.526
1.342** -0.817**(0.739)(0.659)(0.374)

No
No
No
2,270
0.030
227

No
No
No
2,270
0.026
227

No
No
No
2,270
0.027
227

Note: ***, **, and * indicate statistical significant at 1%, 5%, and 10% levels, respectively.
Robust standard errors in parentheses. Constant term is not reported to save spaces.
Source: See Table 1.
Table 4. Baseline Results
(1)
lnQ

(2)
lnN

(3)
lnq

(4)
lnVA

(5)
lnL

(6)
lnlp

Quota removal dummy(year t)Tariff rates(year t)Tariff rates * Quota
removal dummy (year t)-0.174*(0.092)-0.354(0.443)0.876*(0.515)0.028(0.062)0.236(0.324)-0.221(0.332)-0.202***(0.067)-0.590(0.396)
1.097***(0.345)-0.143(0.091)-0.054(0.484)0.833(0.507)-0.147**(0.064)-0.225(0.319)0.615*(0.349)0.004(0.051)0.170(0.296)0.218(0.265)

Industry fixed effectYear fixed effectIndustry-specific time trend
Observations
R-squared (within)
Number of industries
Note: See Table 3.
Source: See Table 1.

Yes
Yes
Yes
2,270
0.717
227

Yes
Yes
Yes
2,270
0.323
227

Yes
Yes
Yes
2,270
0.751
227

Yes
Yes
Yes
2,270
0.752
227

Yes
Yes
Yes
2,270
0.369
227

Yes
Yes
Yes
2,270
0.848
227

Table 5. Effects of the Import Quota Removal on Growth
(1)
lnQ

(2)
(3)
(4)
(5)
Growth rate (between t-1 and t)
lnN
lnq
lnVA
lnL

(6)
lnlp

Quota removal dummy(year t-1)
Tariff rates(year t-1)
Tariff rates * Quota
removal dummy (year t-1)

0.038
(0.031)-0.016(0.166)-0.059(0.149)-0.004(0.018)-0.057(0.105)0.083(0.088)0.042(0.028)0.040(0.168)-0.142(0.140)0.070*(0.036)0.081(0.213)-0.175(0.167)0.027(0.024)-0.108(0.122)-0.012(0.103)0.043(0.027)0.189(0.169)-0.163(0.130)Industry fixed effectYear fixed effectIndustry-specific time trend
Observations
R-squared (within)
Number of industries
Note: See Table 3.
Source: See Table 1.

Yes
Yes
Yes
2,043
0.029
227

Yes
Yes
Yes
2,043
0.051
227

Yes
Yes
Yes
2,043
0.063
227

Yes
Yes
Yes
2,043
0.042
227

Yes
Yes
Yes
2,043
0.028
227

Yes
Yes
Yes
2,043
0.040
227

Table A1. Summary Statistics, by Year

Real output
year

Q

1960
1961
1962
1963
1964
1965
1966
1967
1968
1969

53,64965,49872,392
79,03592,347
97,926
110,529
129,121
151,345
178,294

Number ofestablishments
N
448
465
472
457
445
468
488
484
483
496

Output perestablishmentqReal value-added

Employment

Labor productivity

Tariff rates

VA

L

lp

tariff

595
659
711
814
978
995
1,080
1,328
1,593
1,804

16,434
20,39922,494
26,16530,384
31,42737,36445,644
53,14964,022

23,48425,30725,91826,60927,17527,09027,687
27,79628,282
29,067

0.758
0.832
0.891
1.025
1.160
1.216
1.418
1.717
1.908
2.252

0.153
0.155
0.156
0.158
0.158
0.159
0.158
0.158
0.145
0.136

Note: Average figures are reported.
Source: MITI (1960-1969).
Table A2. Correlation Matrix
Real output
Q
Q
N
q
VA
L
lp
tariffquota
tariff_quota

Source: MITI (1960-1969).

1
0.313
0.595
0.915
0.690
0.406
0.113
0.083
0.145

Number ofestablishmentsN1-0.1090.320
0.777-0.166-0.0030.084
0.052

Output perestablishment
q

1
0.471
0.113
0.429
0.089
0.000
0.053

Real value-added

Employment

Labor productivity

Tariff rate

VA

L

lp

tariff

1
0.690
0.458
0.069
0.121
0.146

1
-0.015
0.042
0.092
0.104

1
0.010
0.099
0.052

1
-0.122
0.421

Quota removal
dummy
quota

1
0.7457

Tariff*quota
tariff_quota

1Table A3. Alternative Specifications
(1)
lnQ

(2)
lnN

(3)
lnq

Quota removal dummy(year t)Tariff rates(year t)Tariff rates * Quota
removal dummy (year t)

0.447***(0.093)-2.541**(1.016)0.380(0.560)-0.014(0.060)0.102(0.345)0.130(0.333)

Industry fixed effectYear fixed effectIndustry-specific time trend
Observations
R-squared (within)
Number of industries

Yes
No
No
2,270
0.240
227
(1)
lnQ

Yes
No
No
2,270
0.001
227
(2)
lnN

Yes
No
No
2,270
0.286
227
(3)
lnq

Quota removal dummy(year t)Tariff rates(year t)Tariff rates * Quota
removal dummy (year t)-0.216***(0.081)-0.756*(0.433)
1.058**(0.475)-0.033(0.062)0.032(0.359)0.131(0.328)Industry fixed effectYear fixed effectIndustry-specific time trend
Observations
R-squared (within)
Number of industries
Note: See Table 3.
Source: See Table 1.

Yes
Yes
No
2,270
0.582
227

Yes
Yes
No
2,270
0.010
227

(4)
lnVA

(5)
lnL

(6)
lnlp

-0.080(0.075)-0.331(0.448)0.819*(0.447)0.687***(0.070)-1.979*(1.006)-0.821*(0.457)

Yes
No
No
2,270
0.285
227
(4)
lnVA

Yes
No
No
2,270
0.016
227
(5)
lnL

Yes
No
No
2,270
0.359
227
(6)
lnlp

-0.182***(0.054)-0.787**(0.334)0.927***(0.283)-0.112(0.084)-0.373(0.477)0.733(0.473)-0.195***(0.073)-0.421(0.444)0.857**(0.430)0.083(0.054)0.048(0.263)-0.124(0.250)

Yes
Yes
No
2,270
0.696
227

Yes
Yes
No
2,270
0.639
227

Yes
Yes
No
2,270
0.038
227

Yes
Yes
No
2,270
0.798
227

0.461*** 0.607***(0.066)(0.095)-2.643*** -2.310**(0.985)(1.156)0.250-0.002(0.429)(0.585)

Table A4. Dyschronous Effects of the Quota Removal: Forward Lag
(1)
lnQ

(2)
lnN

(3)
lnq

(4)
lnVA

(5)
lnL

(6)
lnlp

Quota removal dummy(year t+1)
Tariff rates(year t+1)
Tariff rates * Quota
removal dummy (year t+1)

-0.101(0.080)-0.681(0.630)0.568(0.463)0.027(0.052)0.283(0.486)-0.091(0.277)-0.128**(0.062)-0.964(0.632)0.658*(0.355)-0.090(0.071)-0.185(0.633)0.733*(0.429)-0.089*(0.051)-0.229(0.425)0.430(0.302)-0.001(0.046)0.044(0.391)0.303(0.257)

Industry fixed effectYear fixed effectIndustry-specific time trend
Observations
R-squared (within)
Number of industries
Note: See Table 3.
Source: See Table 1.

Yes
Yes
Yes
2,043
0.697
227

Yes
Yes
Yes
2,043
0.325
227

Yes
Yes
Yes
2,043
0.716
227

Yes
Yes
Yes
2,043
0.731
227

Yes
Yes
Yes
2,043
0.373
227

Yes
Yes
Yes
2,043
0.821
227

Table A5. Dyschronous Effects of the Quota Removal: Lag
(1)
lnQ

(2)
lnN

(3)
lnq

(4)
lnVA

(5)
lnL

(6)
lnlp

Quota removal dummy(year t-1)
Tariff rates(year t-1)
Tariff rates * Quota
removal dummy (year t-1)

-0.149*(0.083)-0.011(0.385)0.895*(0.481)

0.021(0.068)0.242(0.272)-0.128(0.384)-0.170***(0.051)-0.253(0.317)1.023***(0.262)-0.103(0.084)0.235(0.442)0.801(0.486)-0.124*(0.067)-0.179(0.289)0.620(0.384)0.022(0.040)0.414(0.294)0.181(0.198)Industry fixed effectYear fixed effectIndustry-specific time trend
Observations
R-squared (within)
Number of industries
Note: See Table 3.
Source: See Table 1.

Yes
Yes
Yes
2,043
0.699
227

Yes
Yes
Yes
2,043
0.309
227

Yes
Yes
Yes
2,043
0.749
227

Yes
Yes
Yes
2,043
0.733
227

Yes
Yes
Yes
2,043
0.343
227

Yes
Yes
Yes
2,043
0.844
227

Table A6. Differences between Earlier and Later Periods
(1)
lnQ

(2)
lnN

(3)
lnq

(4)
lnVA

(5)
lnL

(6)
lnlp

Quota removal dummy(year t, before 1966)
Quota removal dummy(year t, after 1966)
Tariff rates(year t)Tariff rates * Quota
removal dummy (t)-0.174*(0.092)-0.199*(0.114)-0.361(0.448)0.883*(0.519)0.029(0.062)-0.056(0.102)0.215(0.324)-0.199(0.333)-0.203***(0.067)-0.143(0.120)-0.575(0.399)1.082***(0.348)-0.144(0.091)-0.074(0.120)-0.037(0.487)0.815(0.511)-0.145**(0.064)-0.210***(0.078)-0.241(0.322)
0.631*(0.351)0.001(0.051)
0.137(0.097)0.204(0.292)0.184(0.263)

Industry fixed effectYear fixed effectIndustry-specific time trend
Observations
R-squared (within)
Number of industries
Note: See Table 3.
Source: See Table 1.

Yes
Yes
Yes
2,270
0.717
227

Yes
Yes
Yes
2,270
0.324
227

Yes
Yes
Yes
2,270
0.751
227

Yes
Yes
Yes
2,270
0.752
227

Yes
Yes
Yes
2,270
0.369
227

Yes
Yes
Yes
2,270
0.848
227