ISSN O075-6407

BUSINESS

31 st

REPORT
ANNUAL/C":"[Eg'E'"

ie:a}.---.dt

RESEARCH INSTITUTE FOR ECONOMICSAND BUSINESS ADMINISTRATIONKOBE UNIVERSITY
1985

KOBE

ECONOMIC&BUSINESSREVIEW
31 st

ANNUAL REPORT/t""tlll'llE"o"2•

N ys

RESEARCH INSTITUTE FOR ECONOMICSAND BUSINESS ADMINISTRATIONKOBE UNIVERSITY

1985

CONTENTS
Page
Toward the Negative Picture Theory of Commercial
Double-entryBookkeepingandFinancialAccounting''''''''''''''''IsaoNAKANO 1
Stability of the Demand for Money : Australian Experiences '''''''''Kenichi IsHIGAKI 9"Empirical Study of Changes in Accounting Policy" in the Case ofJapaneseEnterprises'''''''''''''''''''''''''"'''''''"'''''''''''''''HidetoshiYAMAJI 27

An Empirical Study on International Short-Term Capital
MovementsinJapan'''''''"'''''''''"'""'"'''''''''''''''''''''''''"''HidekiIZAWA 41

TOWARD THE NEGATIVE PICTURE THEORYOF COMMERCIAL DOUBLE-ENTRY BOOKKEEPING
AND FINANCIAL ACCOUNTING
Isao NAKANO

1. Introduction-Proposing a "negative picture" view of the business firm andof accounting
The purpose of this article is to develop a hopefully new idea on the business activity

and to expound a new theory on the commercial double-entry bookkeeping andfinancial accounting.
Our starting point is quite common. We assume all business firms are carring on
the process, "cash to more cash", by investing and disinvesting activities.Cash in a

firm is viewed here, however, not as a positive economic force contributing to the
production of future revenues. Cash does have such a future-oriented potential, ofcourse. No one can deny that. Our point simply is that such a "positive picture" viewof economic resources is not consistent with the conventional accounting
measurement.
What, then, is the dimension of business activities being captured by the actual
accounting practice ? That will be termed a "negative picture" theory, and explainedin the following.
By this jargon, we mean cash is doomed to the loss, say, by future payments or
deprival. This aspect of awaiting current or future deprival will be stressed. Our
hypothesis is that current, conventional bookkeeping records, and expresses, thisnegative dimension of a firm's assets, capital and income. A systematic developmentof this idea is offered immediately.

2. The "Negative ficture" View of Assets, Capital and Business Income
Note that not only cash is awaiting loss. All the various kinds of a firm's assets are
destined to deprival (i.e., being lost) by consumption, utilization, transfer or simply byforfeiture. In this sense, all those goods represent "not yet lost" funds invested inthem. We will call this "not-yet-loss".
This view of the essense of every asset as "not-yet-loss" leads us to a uniquevaluation basis of the economic good. That is, "not-yet-loss" is tantamount to "waited

ISAO NAKANO

2

losses", which in turn can be best quantified by the amount of money required, if thegood were deprived, to replenish the firm's nominal capital. This value will be called"nominal ownership value". This label suggests the attribute represented byaccounting practice lies in the cash saving from securing ownership of the good rather

than in its future-oriented economic value. This "cash saving" and "not-yet-loss"

concepts are both sides of a coin, emanating from our "negative picture theory".
Consistency of this valuation hypothesis with current accounting measurement
will be best exemplified by valuation rule of cash. This asset is recorded by its
quantity of monetary units, and not by its discounted present value of the future cash

inflow series which it can generate from its most profitable investment. Our"not-yet-loss" hypothesis is consistent with this valuation. If cash of 100 yen is lost,
no more or no loss than the same units of cash is required to recover the firm's capital.

Our hypothesis thus is that the assets are "not-yet-losses". Then, how about
capital ?
(a) Liabilities can be construed as "losses-in-future". The stress is placed on "loss"
even though it will occur in future, whereas in case of assets the focus centers on

the "not-yet-occurring" aspect of the waited loss, In this sense, assets andliabilities capture the positive and negative dimensions of the same thing-i.e.,

the wealth of the firm-respectively.
(b) Stockholders' equity is the excess of "not-yet-losses" over "losses-in-future". As
such, it can be characterized as that part of the "not-yet-losses" remaining after

the redemption-or covering-of all the losses-in-future. Thus, equity capitalcorresponds to a part of "not-yet-losses" but not the same thing. Equity, likedebts, denotes "suffering-of-the-loss" aspect even though in the future, while theassets, as stated above, represents the positive, "not-yet-occurring" dimension.

Consequently, our conclusion is that stockholders' equity will be best
represented by the label of "possible loss".
We have completed characterizing the balance sheet items, So, let us move to theincome statement and its underling concepts,
The essence of our negative view on the business activities lies in the expression,"not-yet-losses '(assets) - more of the not-yet-losses". It follows the business net

income must be defined as an increase in "not-yet-losses".Since this increase in assets
is naturally reflected on the equity side of the balance sheet, our second interpretation

follows that net income is an increase in "possible-loss". This characterization
corresponds to the fact that business income is subjected to deprival by dividend
payment, accidental losses et al.
These consideration has been restricted to the domain of the balance sheet. Whatis business income, then, from the income statement point-of-view ?
From this standpoint, our theory is that income is an "increase in loss". And so,TOWARD THE NEGATIVE PICrURE THEORY OF COMMERCIAL 3

DOUBLE-ENTORY BOOKKEEPING AND FINANCIAL ACCOUNTING
business firms can be said to be pursuing maxirnization of losses in reality when man
commonly refers to the so-called profit-maximizing firm. These propositions are, so to

speak, the culmination of our negative picture theory of the business firm andaccounting. But, how are those statements possible ?
Note that revenue derives from selling of goods, which shows (gross) loss asvalued by the market, selling price. A difference between, say, fire loss and thisselling loss simply lies in obtaining or not, of compensations. Revenues, thus, isnothing but "compensated-loss". Since net income is the difference between revenues
and expenses, net income is seen to be an excess of the "compensated-loss" over the
expenses which are the same loss measured by past and internally generated costs, notby current market prices. Logically, then, business income is an increase of loss, andthis is the contributing factor to the earning of business income as a
net-asset-mcrease.

We anticipate a couple of theoretical problems in accounting couid be betterattacked when the business income is viewed as an increase in loss, and not as anincrement of positive economic value.
3. The Negative Picture Theory of the Commercial Double-entry Bookkeeping
It will be attempted to demonstrate how the above-stated negative picture theory cancontribute to the understanding of the double-entry bookkeeping process,Our fundamental rule on book entry is that occurrence of positive economic
forces (e.g., acquisition of "not-yet-losses", decrease of "loss-in-future, etc.) is to be

debited and that occurrence of all negative forces (e.g., accrual of "loss-in-future"(liabilities), decrease of "not-yet-losses", et al.) is to be credited.

We will aply this rule to record some typical business transactions indouble-entry bookkeeping.
(a) Issued capital stock.
This is acquisition of cash (or any non-monetary assets) by incurring risk ofloss or duty of repayment to the stockholders. Therefore, some not-yet-losses
flow in as a positive force, followed with possible-loss of the same amount as anegative power. As a consequence, the entry should beoe

Not-yet-losses \XXXX

Possible losses \XXXX(b) Purchase of inventory goods,
This is a simple exchange of a form of not-yet-loss with another of that (i.e.,cash vs. merchandise goods). Therefore, the required entry must beISAO NAKANO

4@e \XXXX
Not-yet-loss(ex,, inventory), Not-yet-loss \XXXX(ex. cash) .

Production process in manufacture can also be classified into thiscategory,(c) Selling of inventory goods.
In essence, this kifid of transactions clearly belongs to (b) above, because it

consists in an exchange of some "not-yet-loss" (e.g., an inventory good) withanother (e.g,, received cash). Our hypothesis, however, is that considering theimportance of this transaction to the firm, accountants have chosen to separate

this in the following two steps for the production of detailed information.
( i) Hypothetical recovery of incurred losses under stationary condition. On one

hand, the entry usually is made :@ocost of sales \XXXX

inventory goods \XXXXThe reason for the creditor entry is self-evident: a not-yet-loss has
decreased. More difficult is a consistent explanation for the debtor side, Is

expenses occurrence of a positive economic force ? We dare say, "Yes, in asense." In what sense, then ?
In our negative picture theory, business income is interpreted as anexcess of compensated loss (i.e., revenue) over internally incurred losses (i.e.,

periodic expenses). If these expenses as losses are measured by amounts

which could have been avoided if no activities had been planned nor
performed during the year-referred to as the "stationary condition"-,business income as an excess of compensated, over avoidable, losses clearly
indicates the degree to which this year's activities have been efficient inincreasing wealth of the firrn. It is so because the ex-post value of businessactivities depend, to a large extent, upon how much the compensation
exceeded the otherwise (i.e., under the stationary alternative) avoidable

losses.
This analysis has shown the relevance of conceptualizing expenses as"avoidable losses under stationariness" and measuring them accordingly. Our

hypothesis is that bookkeeping has developed as if it were designed toaccomodate this interpretation of annual expenses. The "avoidable loss" iseconomically equivalent to imaginally "recovered" loss under thatstationariness assurnption. And hence, as a recovery, that is, as incoming of

TOWARD THE NEGATIVE PICIURE THEORY OF COMMERCIAL 5

DOUBLE-ENTORY BOOKKEEPING AND FINANCIAL ACCOUNTING
positive force, all expenses must be recorded on the debtor side.

(") The incurring of compensated losses.
The other side of sales transaction is the realization of revenue andaccompanying receipt of compensation. An appropriate example will be:oecash sales
\XXXX
\XXXX
Interpretation of the debtor side is quite easy: it denotes an increase in
not-yet-losses (assets). We have also explained the compensated "loss" character ofrevenue, so as a loss it is an incurring of negative power. Hence, the creditor entry isappropnate.
We will try to aggregate our theory of business activity and bookkeeping in
Table 1.
Table 1. The Negative ficture of Business Activity Precess(Collection of funds),
CapitalPossible-loss or Future-losse,AssetsNot-yet-losseso,Expenses

Not-yet-losses-under-stationariness,

RevenueoLoss-increasing process

Compensated-lossese,Recovered
AssetsNot-yet-lossesoReceipt of economic goods from equity or debt capital will result in the firm incurring

the risk of "possible-loss" of the goods or the duty of future redemption-i. e.,
future-loss-, accompanied with acquisition of "not-yet-losses". Most of the obtained

goods will be utilized, that is, intentionally deprived, to get more of assets(not-yet-losses)-the step of collected "not-yet-losses". This deprival process is, as

stated aboved, divided into two phases of expensing (occurring of
not-yet-losses-under-statianriness) and of earning revenues (compensated-losses), An

important function of comparing the compensated, with avoidable, losses consists inevaluating the efficiency of business efforts with the latter amount as a benchmark.

Table 2 reflects interpretation of the balance sheet as well as the income
staternent in the light of our negative picture theory.

ISAO NAKANO

6

Table 2. A Negative

Mcture Interpretation ofoFinancial

StatementseBalance sheet
Assets(Not-yet-losses)
Liabilities(Future-losses)

Equities(Possible-losses)

Net income(An increase inlosses and in

not-yetpossible-

losses)oIncome statementeExpenses(Not-yet-losses-under-

Revenues

stationariness)(Compensated losses)

Net income(An increase in compensated-losses)

implications for financial accounting
4. Concluding Remarks-Somedeveloped
our negative picture theory of double-entry bookkeeping. An
We havethus
advantage of our viewseems
to lie of explanation with respect to thein thesimplicity

income statement aspect, Revenues are to be credited to the income account because

it is a loss. Annual expenses
be they represent positive
debitedmust
becausef acquisition(ororecovery) of not-yet-losses-under-theeconomic powers
in the sense
stationariness-assumption.
And both of theseconcepts have been shown to rest on our

negative picture viewof businessincomeas an' increase in loss.

We wish you to anote,
however, implications of our theory tofurther-reaching
the understanding ofaccounting
conventionalmeasurement rules.
(1) Why is it that revenues
generallyare
recognized at the times of sales ? Our
answer is thatasrevenues"compensated losses" only occurs on the deliveringof merchandise toConversion
customers. of raw materials into products
generates a grossformer
loss of good,theof course, but there occur no11ectionof Co
receivables in cash will surely result in thecompensations
as yet,loss of the claim, butthe
it isbringing
notin of compensation. The

the timeof sale in the form of thecompensation hadatbeen
provided
receivable, and the collectedcash a change in the kind of thesimply meanscompensatlon.
(2) Why is the lower-of-cost-or-market rule admitted despite general prohibition of

TOWARD THE NEGATIVE PICTURE THEORY OF COMMERCIAL 7

DOUBLE-ENTORY BOOKKEEPING AND FINANCIAL ACCOUNTING
recognizing unrealized profits ? Our answer: if the inventory had not beenpurchased before the end of this year and if it were acquired at the declined

year-end price, the loss between the higher actual cost and the current
replacement cost could have been avoided. In this sense, this valuation loss
does belong to a "not-yet-loss-under-stationary-condition" (= "avoidable loss")and as such, must be charged to current income account.
(3) In accounting practice, historical acquisition cost means, strictly speaking, a"normal" cost rather than the actual cash outlay. In accounting literature, thenormality criterion especially refers to (a) eliminating from costs abnormal

physical consumptionsi) and (b) excluding abnormally high portions ofacquisition prices2).
In the face of such complex rules, our apparently plausible question will be:

why is it that historical cost concept rests upon such an ambiguous normality

rule and does not simply reflect actual cash expenditure ?

Our answer: such abnormal physical consumptions or abnormally highportion of acquisition outlay could have been avoided by a more carefulbusiness activity. In this sense, such losses are exhaustions of the firm's wealthand may well be regarded as "not-yet-losses-under-stationariness". In otherwords, we will be justified in considering that the firm's wealth has decreased,mutas mutandis, by the amount of such abnormal losses. This interpreation
inevitably leads to the necessity of charging those abnormal losses to current

lncome statement.
It is anticipated that our negative picture theory still holds much more potential

in advancing our understanding of conventional accounting system.

1) Sidney
P. 38-21.
2) Idem.,Davidson (ed.), Handbook of Modern Accounting, Mcgraw-Hill, New York 1970,

P, 17-18.

STABILITY OF THE DEMAND FOR MONEY :AUSTRALIAN EXPERIENCES
Kenichi ISHIGAKII Introduction
Australian monetary authorities have adopted money supply control policy in order todepress high inflation rate since 1976. The treasurer publishes in the budget speech amonetary target (projection) in form of a zone of the growth rate of M 3. The Reserve
Bank has endeavored to control monetary aggregates, especially M 3, within the zone

through monetary instruments, mainly direct control on the banking sector,

However, this money supply control policy has some problems. Firstly, thispolicy theoretically is based on the stability of the demand for money or the velocity

of circulation of money. However, the stability is not self-evident, but should beascertained empirically.

Secondly, this policy assumes high controlability of the money supply bymonetary authorities. However, the Australian financial system was not necessarilyadequate for the control of the money supply. Interest rates of government securities

were not freely determined by the market force, but controlled by monetary
authorities. The exchange rate was also determined by monetary authorities. Thissituation means that money supply control will be disturbed by fiscal conditions andthe balance of payment.
Thirdly, the implementation of monetary policy did not necessarily coordinate
with fiscal policy and exchange rate policy. A large government budget deficit put

pressure upon money supply and caused to overshoot it above the target zone,
Exchange rate policy was assigned not to equilibrium of balance of payment but toreduction of the inflation rate, therefore the monetary base tends to move'erraticically and made it difficult to control the money supply. The main purpose ofthis paper is to estimate the demand for rnoney function and ascertain whether thefunction is stable or not. That is the first problem of the above three.

ll A Model of the Demand for Money Function
The stability of the demand for money is one of main disputes between theKeynesians and the Monetarists. Since M. Friedman restated the quantity theory ofmoneyi) as a theory of the demand for money, many economists have attempted tovery10 KENICHI ISHIGAKI
study the demand for money function empirically in advanced countries like the USA,
U,K,, Japan etc2). Some economists found that the demand for money functions were
not as stable as monetarists have asserted. In Australia, there were some empiricalstudies of the demand for money function3), however we can not find empiricalstudies which dealt with this problem in the period from the last half of the 70's to thebeginning of the 80's,

The demand for money function is as follows :M Mdp = p (y,R,Rdi IRe)••••••-••••••••••••••••••••••-••-•-••••••••••••••••••••••••••••••••(1)

One important problem is whether the demand function should be treated in
nominal or real terms. We treat it in real terms because people want to have money interms of the purchasing power of money and also a demand function and a supply
function should be identified separately in order to minimize the estimation bias.
Usually the money supply, whether it is controlled strictly by monetary authorities ordepends on the interest rate and loans by banking institutions, is treated as nominal

money, Therefore we may evade the identification problem if we treat the demand
function in real term,
In (1) equation, the independent variables are real income (y), nominal interest

rates (R), own rate of return on money (Rd) and the expected inflation rate (IRe).
Almost all economist except strict monetarists admit the first two variable, N, R, areincluded in a demand for money function. One related problems is which interest rateshould be included in the model. Four interest rates-short term (three month treasurynote) RT, medium term (two year treasury bond) R., long term (twenty year treasurybond) RL, and own rate of return on money (interest rate of time deposit with maturity

three month to less than six month) Rd-are used in the regression equation.

The expected inflation rate is also included in the regression equation.
According to economic theory, nominal interest rates moves with the expected rate of
inflation. However, the nominal interest rate might not reflect exactly the expectedmovement of inflation,and expected inflation will make effects not only through thenominal interest rate, but also directly on the demand for money because of
substitution between money and real assets.
The other problem of estimation of the demand for money is the adjustment lag

problem. The desired demand for money function is written as follows :1) M, Friedman [5].
2) Goldfeld f6], [7], Laidler [15] in U.S,A, Artis and Lewis [1], Goodhart [8], Laidler and Parkin[16], Hamburger [10] in U.K. Tsutsui and Hatanaka [22] in Japan. OECD [19], Boughton [2] inadvanced countries.
3) Davis and Lewis [4], Lewis [17], Norman and Purvis [18].

STABILITY OF THE DEMAND FOR MONEY 11
AUSTRALIAN EXPERIENCES

M

Log( p)r = a o+ Po Log yt + Bi LogR, •••••••••-•••••••••••••-••••••••••••••••••••••••(2)

If variables on the right hand side of equation (2) change, desired demand for money(-llll-)* is not necessarly met instantaneously, but the adjustment is rather slow asfollows :Log( lll)t- Log( Iill)t-i =A [ Log( ill)f- Log( l]l)t-i] ''''''''''''''''''''''''' (3)A is the adjustment speed and 1 >A >O. Substituting (2) into (3),we get equation (4) :Log( p), = aoA + BoA Log yt +Bi A LogRt+(1- A) Log( p)t-i ''''''''''(4)P,>O, i6? i<O, 1> A >O
We call equation (4) the basic model and equation (5) the enlarged model.

M

Log(p)t=aoA+ l3oA Logyt+BiA LogRt+P2A LogRdt+P3A IRf
M+( 1- A ) Log( p)t-i '''''''''''''''''''''''''''''''''''''''''''''''''''''''''(5), M,(i)m p case, i(?o>O, Bi<O, B2<O, P3<O(ii)in Mp3 case, Bo>o, X?i<O, B25.0, B3<O

STD
(HO in p case, Bo>O, Bi<O, B2>O, I33<O
We assume that IRfis equal to inflation rate at period t.

We use three monetary aggregates, Mi, M3, and STD. Mi is composed ofcurrency in circulation and demand deposits of trading banks. STD is time deposits oftrading banks and deposits of savings banks, M3 is equal to Mi plus STD.

M Estimation of the Demand for Money Filnction (1)-Basic ModelThe demand for money functions will be estimated for the following four periods,[1961• M -- 1982• IV], [1961• M -69• IV, 70•I -- 79• IV ], [1961• M -- 1973• IV, 1974• I'-'

1982' IV], [1961' MN1975' IY, 1976' I -" 1982' IV]. The first period [61' M -- 82 ' IY]

is the whole period with which we are concerned. The second one is divided by 1970.
The third period [61'M -"73'IV, 74'I "v82'IV] is divided by the first oil shock. The

fourth period [61'MN75'IV, 76'I'w82'rv] is divided by the change of theTable 1. EstimationMi
Log(p)of the Demand for Money Function

const

Logy

LogRT LogRE LogRL LogRd-O.140O.137-O.067(-5.04)(-O.60)-O.245

61•M-82•rv(4.70)(-O.97)-O.207(5.00)(-O.69)(4.35)-O.240O.192(5.25)(-O.86)-O.074

O.211(5.39)

EnlargedModel

O.775(5.13)-O.622

O.227

o.o.o.o.o.o.

(12.50)O.735(10.949)-O.048-O.033(-1.16)-O.OOI

O.690(-L49)-O.046(-1.22)-O.OOI(9.713)(-1.22)-O.134(-1.09)-O.OOI(8.77)-O.046o.o.o.o.o.o.

O.664(-L19)

O.O15(O.28)(-3.33)(-O.92);

R21S•E

O.759-O.094(-4.28)

O.313(-O.14)Log()-i(13.06)

O.170(-O.84)-O.278

61•M--82•IV

IRe-O.082(-5.23)

O.159

BasicModel[1%1• M -1zz2•rv]

O.423(4.78)

876
O17
867
O17
832
O17
845
O17
820
O17
538
O17

d•wlP

h

E.N.*

026

O.143

I-1

O.334

I-2

O.269

I-3

O.352

I-4

O.583

I-5

O.313

I-6

2.o.2.o.2.o.

331

2.o.2.o.2.o.

059
367
046
420
058
422
09
474
039
422

M3
Log(p)(-4.15)-O.709

61•M--82•IV(5.38)-O.043(-5.2)-O.051(-5.50)O.244(-4.51)-O.708

BasicModel(-3.70)-O.595(-3.83)-O.653

61•--82•rv(5.69)(5.08)

O.205(4.43)(-4.36)-O.688(4.75)(-3.47)(4.95)

O.729

o.o.o.o.

O.710(12.36)

O.O17 -O.OO03-O.056(-2.97)(O.81)

O.038-O.082(-3.82)-O.045O.264

o. 993o. O14(14.30)-O.056(-4.32)

O.257

O.207

EnlargedModel

O.740(14.49)(1.27)(-O.59)-O.OO03(1.76)-O.Oll(-O.56)(-O.42)(O.55)

O.OO03

O.772

o.o.o.o.o.o.

(13.04)

O.782(14.05)

O.694

993
O14
992
O14
993
O14
994
O14

1.o.1.o.1.o.

1.o.1.o.1.o.

I-7

O.146

I-8

O.173

I-9

O.242

I-10

O.140

I-11

964
105

O.203

I-12

O12
083
O18

O.600

I-13

O.Ol

I-14

O.02

I-15

OO04

991

(10.97)

O.229

956
059
972
O16
967
102
955
032
974

O15

STD

Log(p)-O.644O.148(-2.75)-O.768(3.32)(-3.38)-O.894(3.93)

61•M--82•IY-O.056(-2.79)O.168

EnlargedModel(-3.05)' Equation Number
Data : IMF, Jnternational

O.206(3.77)

Financial

Statistics.

O.036

(L59)
-O.097(-3.80)-O.OO03(-O.45)-O.OO02

O.061(2.61) (-O.34)-O.078(-L92)

Reserue Bank of Australia, Bulletin.

O.030

(L05)

O.OO05(O.69)

O.860(20.59)O.853(21.76)

O.812(17.86)o.o.o.o.o.o.

996
O18
996
O17
995
O18

2.-o.2.-o.2.-o.

11

O17
083

xtn
Z
N
n
:
N
as
:
N
a
>
x
N

STABILITY OF THE DEMAND FOR MONEY 13
AUSTRALIAN EXPERIENCES

Australian monetary policy from Keynesian to monetarist in 1976.

We will estimate the demand for money function and assess the degree ofstability based on the whole regression result, that is sign and value of coefficient andstatistics of regression, chow test and prediction.

(1) The Longrun Demand for Money function (61'M'v82'IV)
The regression results of A4i and M3 on the basis model in 61' MN82' rv period
are shown in Table 1. We got good regression resuits. Sign and values of coefficientare good and also statistics like t value, adjusted R2, standard error (S.E.),
Durbin-Watson statistics (d ' xv), h value show very good results. Long-run elasticitiesof the demand for money with respect to income and interest rate are shown in Table

2. Comparing regression results of M3 with results of Mi, it seems that the former
regression is better than the latter one.

(2) 60's (61'M 'v69'rv) and 70's (70'I 'v79'IV)
Table 2. Long Run Elasticity of Demand for Money with y, R. [1961, III ev1982-IV]

Model

independentv.
dependentv,

M,IP
BasicModel

M3/P
MilP

EnlargedModel

M,IP
STD/P

y

RT

O.61
O.66
O.64
O.87
O.90
O.89

-O.30

O.62
O.63
O.54
O.90
O.95
O.86
1.06
1.14
1.10

-O.11

Rs

RL

*

-O.34

*

-O.36
-O.17

*

-O.19

-O.14
O.03

-O.25

*

-O.15
-O.14
-O.23
O.07
O.17

-O.38
-O.15

-O.04

-O.42

O.26
O.42
O.16

-O.66

Table 3 shows good regression results in both 60's and 70's, all statistics are
satisfactory. Regression results do not depend upon selection of interest rate.
Comparing the regression in the 60's with one in the 70's, we found that the long-run
elasticity of income and interest rates increased in the 70's, and the adjustment speed (A)became 1arger and fitness of regression of both Mi and M3 declined.
Do these changes imply structural change of the demand for money function ? In orderto determine this , we did the chow test and found null hypothesis that structural change did

not occure was not rejected except Rs case in Mi regression (Table 4). This finding may besatisfactory to monetarists who believe in the stability of the demand for money function.
However, the result of the chow test depend upon the period, so that it does not necessarilymean that structural change did not occure during 70's.

*
.

-O.19

-O.40

Rd

Table 3. Basic Model [1961•Ill --69•TV, 70-I--79•IV]

M,
Log(p)

61•M---69•rv

70•I--79•rv

Logy

LogRT

O.217

O.138

(O.67)(2.60)-O.071(-1.98)

const

O.132

O.100

(O.46)(2.55)

O.177

O.085

(O.57)(2.05)-1.129O.254(-2.08)(5.08)-1.245(-1.97)-O.981(-1.198)

O.264

LogRs

M
LogRL Log(p)-i-O.066(-2.29)-O.069(-1.47)-O.108(-6.68)(4.52)(3.38)

d•wlP

h

O.825

O.700

O.900

L 792

O.O13

o.

E.N.
ll-1

048

O.794

O.922

1. 812(7.50)

O.O13-o. 078

O.818

O.909

L 829

(7.32)

O.O13-o. 039

O.748

O.885

L 941

O.O17

o.

O.854

L 956

(11.58)

O.O18

o.

162

O.701
(8.19)

O.766

1.

905

O.O19

o.

296

O.760

-O.156(-4.16)O.275

R2IS•E(5.60)(12.58)-O.122(-5.86)

ti:

O.550
O.628
O.195

ll-2

ll-3
ll-4

074
O.151

O.185

ll-5

x
ta
Z
?s
s

ll-6

as

Log(M
p3)

---

-O.525(-2.05)61•M--69•IV

70•I--79•rv

:
a
>
x
-

O.173
(2.43)-O.024(-1.24)

O.809

O.996

(10.03)

O.O09

2.

027

-O.499O.170-O.028

O.811

O.996

(2.02)(2.47)(-L57)(10.64)

O.O09-o. 224-O.569(-2.34)O.791(2.91)-1.207(-2.69)(4.15)-O.051(-2.001)

O.194
O.273

-L254

O.273

(-2.63)(4.02)-O.945(-1.52)(3.19)

O.277-O.065(-4.54)-O.075(-4.31)-O.072(-2.52)

2.

079

O.997

2. 095(11.06)

O.O09-o. 239

O.765

O.920

(9.40)

O.O17

O.091

ll-7

-o. 191

L-o.

998

O.351

O.328
O.O07

ll-8

ll-9

ll-10

036

O.773

O.913

(9.18)

O.O18

O.721

O.865

1.

960

(7.07)

O.020

o.

103

L-o.

979

O.736

li-11

OOI

O.162

g-12

STABILITY OF THE DEMAND FOR MONEY
AUSTRALIAN EXPERIENCES

15

Tab]e 4. Chow Test (Basic Model)

RT

Ml
Rs

M3

RT

RL

RL

Rs

61•M--69•IY

Ffi

1.89

2.36'

1.83

1.31

1.06

O.37

74•I--82•rv
61•M--75•IV
76•I--82•rv

Fts

4.25**

5.88*'

2.72*

5.93**

5.85**

4.82**

Fts

6.02**

4.80*'

4.05**

4.38**

2.94'

2.69*

70•I-79•rv
61•M-73•IY' significant at fi.ve percent level" significant at one percent level(3) Pre-Oil Shock Period (61 ' M"73' rv) and After-Oil Shock Period (74 ' I -- 82' IV)

The oil shock at the end of 1973 deeply affected the world economy. It seems that

the Australian economy was also effected by the shock, so we should ascertain
whether the real side shock (oil shock) destabilized the demand for money function or
not.

Table 5 shows the regression results of both period, The regressions in pre-oil
shock period are rather good, especially in the case of RT(M-1, M-7). However, theregression results in after-oil shock period changed considerably. The demand for Mi

function (M-4) is rather good, but R2 declined considerablly. The demand for M3
function (M-10-v M-12) changed rather drastically. Firstly, signs of each interest
rate are not clear. Secondly, the adjustment speed ( A ) increased greatly. It means that

economic instability and high inflation by monetary disturbance and the oil shock

sped up the adjustment of money holding. These changes suggest that structuralchange of demand for money function might occur between pre-oil shock period andafter-oil shock period. This was ascertained by the chow test (Table 4). The demand
for money functions reflect also the structural change of real side of the economy.
Figure 1 (a), (b) shows comparison between actual and predicted demand for money.

The accuracy of prediction is shown by RMSPE (root-mean-square-percentageerror) and it shows the same level of prediction for Mi and M3.
(4) Pre-Monetary Policy Change Period (61 ' M -v 75 ' IV) and After Its Change Period(75' I -v82' rv)

One of the debates on the demand for money function is whether change of modeof monetary policy affects it. N.Kaldor and C,A.E.Goodhart argued that its change

would induce big effects on the stability and predictability of demand for money

function4). Australia monetary policy changed drastically from Keynesian tomonetarist, We should examine whether this policy change affected the demand formoney function.
4) Kaldor [13], Goodhart [8], [9].

Table 5. Basic"Mi
Log(p)

61•M-73•IV

74'I's'82'rv

Logy

LogRT

-O.247

O.106(-1.90)(4.06)-O.078(-5.13)

const-O.353

O.077(-2.40)(3.09)-O.463O.083(-2.23)(2.86)-2.727

O.341(-2.69)(3.34)-3.579O.452(-3.73)(4.49)-2.379(-1.86)(2.80)-O.309(-2.88)(2.26)-O.346(-2.76)(2.45)-O.509(-2.82)(3.04)

Model [61' M '-73•rv,

LogRs

74tI--82-IV]

M
LogRL Log(p)-i
O.862(14.42)-O.072(-4.54)-O.103(-3.69)-O.151(-5.01)-O.128(-2.76)

O.396

R2IS•E
O.978
O.O13

d'wlP

h

874

O.485

1.

-o. 180

O.977

L 919

(15.45)

O.O14-o. 205

O.961

O.969

(13.41)

O.888

O.O14
O.764

(7.98)

O.O19

O.942

-O.091(-3.40)

a

1.

873

O.309
O.510

-o. 101
!-

892

o.

245

O.854

O.803

1.

952

(8.67)

O.O17

o.

284
911

O.720

O.640

1.

(5.62)

O.O19

o. 435

O.423
O.175
O.488

E.N.
M-1

M-2
M-3
M-4
M-5
M-6

M3Log(p)61•M-73•rv

74-I--82•rv

O.078

O.938

-O.054(-5.19)(21.93)

O.387(O.57)(4.80)

O.031(6.03)(5.03)

1.029

O.366

(L22)

(4.29)

O.414(18.99)-O.055(-2.72)

O.154

O.514

O.912

-O.048(-4.03)

O.096-O.O14(-O.64)-O.033(-1.22)

O.848(14.80)

O.998

L 938

O.OIO

-o. 246

O.997

L 929

O.OIO

-o. 148

O.995

L 921

O.OIO

o. O02

O.282

O.750

2.

108

(L83)

O.O16

o.

097

2.o.

108

O.321

O.753

(2.08)

O.O16

O.020

O.228

O.742

2.

(O.07)(1.56)

O.O16

o. 097

O.227
O.260
O.297
O.798
O.798

108
104

O.623

M-7
M-8
M-9
M-10
M-11
M-12

x
m
Z
8
E
as

:
M
Q
>
x
H

STABILITY OF THE DEMAND FOR MONEY
AUSTRALIAN EXPERIENCES
Figure 1 (a). Actual Value and Predicted

Figure 1 (b). Actual Value and Predicted

Value [Mi] [74•I•-75•rv]

Value [M3] [74•I•v75•rv]

%

14
12

%

10

10
... !"

5
,

ti

"'

o

:i
:lt'

ti

,/r'

.

s

,t7' ---C::3!L,g8iV:,.,,A)

,",>:

Nx.:

-15
k

-20

,N,.
:, x,X

i' X,,N,

ttt

,

•v

-5
-10

8
6
4
2

"'---' Basic Model M'1
Predicted Value (B)---..Enlarged Model V-7

RMSPE=O, 52% (A)==O. 68% (B)74•I ll M rv75•I ll M rv

-2
-4
-6
-8
-10

:

t>- ti

X'Xi>, ..t,ll7 .;r.:':;-... S,iil//s2V•ga2:,iifie-s"'ilt--` •-----•ll.'rSiELxdillgL,",e,(B)
,

-12

Vl-7

RMSPE=O, 52% (A)=O. 48% (B)74JI ll M rv75•I ll M rv

Table 6 shows that fitness of the regression of M7i and M3 in pre-monetary policychange (61'MN76'IV) is very good, especially in case of RT(IY-1, IV-7). On theother hand, the fitness of regression of Mi and M3 in after-monetary policy change(1976' I -v1982'IV) declined very drastically, Firstly, the adjustment speed (A)changed very much, The adjustment speed of (IV-2) in the pre-monetary policychange is O. 27, which means people adjust a part, that is 27% of the differences

between desired money stock and actual one. However, the adjustment speed of Mi

and M3 in after-period does not statisfy 1>A>O condition. In case of Mi, A is
negative value, and A is larger than 1 in case of M3. This may indicate money supply

control policy made the structure of the demand for money function change
drastically. Secondarily, the estimated coefficients of interest rates also change
drastically. The coefficients of interest rates of Mi and M3 in pre-period met the signcondition and t test. However, the coefficients of interest rate of demand for M3
function in the after-period are not satisfactory, because the sign is positive in somecase ( Rs case) and tvalues are not significant in all case. Thirdly, the statistics like
R2, S • E, d • zv and h in after-period are not satisfactory in comparison with the resultsof pre-period regression.

17

Table 6. Basic

Ml
Log(p)

61•M--75•IV

76-I--82•rv

const

Logy

LogRT

-O.165

O.176-O.103(-L07)(6.83)(-8.01)-O.219(-1.03)(5.40)-O.178

O.223(4.16)-3.056(-3.05)-1.964(-3.18)

O.297
O.174
(2.27)-O.667(-3.92)(4.03)

O.206(1.29)

LogRs

O.713
(13.40)O.730-O.084(-2.82)-O.117(-4.96)-O.111(-6.86)as

R2IS-E

d'wlP

h

O.955

1.922

O.321

O.O15

O.044

O.924

1.972

O.O16

O.207

O.636

O.829

2.021

O.112

(7.09)

1.092

O.O18
O.892

O.435
1.340

1.990

(IL17)

O.O17

O.022

1.054

O.939

1.265

(13.76)

O.O14-O.157

1.09

O.962

1.419

(17.96)

O.O12-O.297(IL26)-O.132(-3.72)(2.50)

76•I--82-IV]

M
LogRL Log(-p-)-i-O.107(-5.98)O.175(-O.50)-2.395(-1.66)

Model [61• M --75-rv,

O.121

2.090
1.580

E,N,
rv-1

rv-2

rv-3.
rv-4
rv-5

rv-6

M3Log(p)61•M-75•IV

76•I--82•rv

O.207-O.055(-5.06)

O.784(12.43)

O.993

1.964

O.O14

-O.OOI-O.749(-3.99)(4.24)-O.892(-3.50)O.294-O.066

O.684

O.989

1.954

(4.33)(-3.23)(8.92)

O.O15

O.127

-O.098(-O.51)

O.851

1.502

O.OIO

O.159

-O.021(-O.10)

O.855

1.478

O.OIO

O.191

O.232

1.552

O.507

(1.53)(4.11)

O.759'-O.061(-4.67)(IL44)-O.023(-1.11)

O.664

O.551

O.O03

(O.68)(4.74)(O.14)

O.992

1.961

O.O14

O.049

O.493

O.556

-O.O02

o.ooo

O.857

1.488

(O.64)(4.92)(-O.09)(o.oo)

O.OIO

O.159

O.154
O.165

O.213
59.44

rv-7

rv-8
rv-9
rv-10

Å~

rv-11
Å~

IY-12

xtu
z
?s
a
:
H
a
>
x
-

STABILITY OF THE DEMAND FOR MONEY 19
AUSTRALIAN EXPERIENCES

These changes suggest that some structural change might haved occured between
the two periods. The results are ascertained by chow test. The null hypothesis that
there was no structural change between two periods was rejected at the 1 percent level(in case Mi and in RTcase of M3) and 5 percent level (in the Rs and RL case of M3) asshown in Table 4.
Figure 2 (a), (b) show the result of prediction by using regression equation (IV -1)

and (rv-7). In comparison with the accuracy of the prediction of Mi and M3 by
RMSPE, M3 is better than Mi. And also comparing with the prediction of 74-75 case,the accuracy of prediction of this case is better than 74-75 case.
These Regression Results by the basic model, as shown above, suggest that thereal side shock at the end of 1973 and the change of mode of monetary policy in 1976

affected the demand for money and destabilized it.

Figure 2 (a). Actual Value and Predicted

Figure 2 (b). Actual Value and Predicted

Value of M. [76•I--77•rv]

Value of M3 [76•I•-77•rv]

%

lg

5

x
4

N

li

M,

3

ActualValue
P:edictedValue(A'"2

BasicModelIYJ7
PredictedValue(Bi':EnlargedModelWA,•s,/N,Nv:
1

RMSPE==O.27%(A)=O,31%(B)

"
11

E

ll
JL

t

.:

}t

o

v,

-1

"• ,

o-1

:1"i-s1',

x'!,sl"s

l, '

N

-2
-3

LR

s

H Actual Value
Predicted Value (A)t-'""Basic Model rv-1

-2

Jt

Ni

y

76•I ll M rv 77•I ll M rv

1K

,

N.

...-.- Predicted Value {B)Enlarged Model V-14
RMSPE=O. 37% (A)=O, 68% (B)

,

-3

v

76•I ll m rv 77-I ll m rv

20

KENICHI ISHIGAKITV Estimation of the Demand for Money Function (2) --An Enlarged ModelIn this section, we estimate the demand for money function by using equation (5)5), A
feature of this model is, in comparison with the basic model, that it includes own rateof return on money,` e.g interest rate on time and saving deposits (Rd) and expected

inflation rate (IRS. However, the inclusion of Rd in the model may add someambiguity to the sign of R in case of M3 regression because the demand for Mi (acomponent of M3) have negative sign to Rd, but the demand for STD (the othercornponent of M3) have positive sign to Rd, and both Tand Rdtend to move toward thesame direction. In order to evade this ambiguity, we will also estimate the demand for

the STD function.
We estimated this model in the same periods as the basic model. These results areshown in the Table 7N9 and are similar to the results of the basic model, The tables

and the Table 10 (Chow Test) show that structural change of regression equation anddestabilization of demand for money, Mi, M3 and STD by the oil shock and the changeof mode of monetary policy.
We should examine effects on the demand for money regression of Rd and IRe.
The sign of coefficients of Rd of Mi regression in the whole period ( I -4•-' I -6 inTable 1) is negative and the tvalues are not so bad. The sign of coefficient of Rd of

STD regression (I-13NI-15) is positive as the theoretical relation implies.
However, regression results of Rd of M3 regression are not good, and the sign isambiguous. These results are similar to the results in other periods. This ambiguity ofthe sign reflects the fact that M3 is composed of Mi and STD.
We should further note that t values of almost all coefficient of interest rate (RT,Rs, RL) in the cnlarged model are very low in comparison with the basic model. This
results suggest that there is some multicollinearity between R and Rd because bothinterest rates tend to move simultaneously toward same direction.
The regression results for the expected inflation rate (IRb are not satisfactory as

a whole because even sign conditions except a few case are not met and tvalues are
too low. This may imply that the expected inflation rate will be reflected on thenominal interest rates and it will affect the demand for money not directly but throughthe nominal interest rate6).

5) We also estimated following model :Log(-iEr)t = A a + A Po Log yt + A Bi LogRt+ A B2 IRf+(1- A) Log (-is-)-iand Log (-Iis-)t = A a + A i?o Log yt + A Bi LogR t+ A i? 2 LogR dt +(1- A) Log (-Iis')-i

The results are very similar to results of the basic model and the enlarged model.

STABILITY OF THE DEMAND FOR MONEY 21
AUSTRALIAN EXPERIENCES
V Summary
We summarize our findings on the Australian demand for money function in various
periods as follows.
(1) Interest Rates (R) are important in the demand for money function, however the
long-run elasticity of demand for real money with respect to interest rates is not

so large.
(2) In general, in estimating the demand for money function, the regression result of

short term interest rate (RT) is best of the three interest rates, and fitness of
longer term interest rate declines. These results mean that the short term asset(treasury note in this case) has the highest substitutability for money of the threefinancial assets.
(3) Own rate of return on money (interest rate on Savings and Time deposit) also
affects the demand for money function, however its effects on M3 are ambiguous

because of the nature of M3.
(4) Real income also is very important in the demand for money function. The
long-run elasticities of demand for money (Mi, M3) with respect to real income
are less than 1 and the elasticity of STDis larger than 1. However, the short-term

elasticity varies widely,(5) The expected inflation rate does directly affect the demand for money. It seems
mainly to affect the demand function through the nominal interest rate. In other

word, the substitution between real money and real assets is not so high.
(6) The regression results for the long-run demand for money function is very good.

However, this result does not necessarily mean that a structural change in the

demand function did not occur. The oil shock and change of mode of monetary
policy in mid 70's certainly destabilized the demand for money function. It
seems that the demand for money function is not as stable as monetarists assert.
6) This result clearly depend upon the assumption of expected inflation rate, We assume it asIR"=100Å~(P,-P,-4)/P,-4, However, if we assume it as IRe=4Å~100Å~(Pt-Pt-i)IPt-i,
we got the following result in the whole period.

M,

Log( p )= (10i.335gl) + <Os.li67) Logy- (Oi 13. 01 73) Log Rt" (O: 10. 46 36) LogR dt- (O: 49 go2) JRf

M,

)t-1
+ O. 742 Log(
(10. 97) P(R 2 ==o. 863. d - zv =2. 099)

M3

Log( p )= (zOi6g5i) + (03•.126sO) Logy rf (O: 39 g21) Log Rt+ (Oi.2s8i) LogR dt - (OL 79 2s2) IRf

M,(13. 93) P+O. 855 Log(
)t-1
(R 2 == O. 991, d• w= 1. 950)

Table 7.

Mi )
Log(p

61•M--69•IV

70•I-79•rv

61•M--73•IV

74•I--82•rv

61•M--75•IV

76•I--82•rv

const

Logor

O.486

O.024

(O.20)(O.45)

O.889

O.132

(O.27)(2.78)

O.156

O.134

(O.48)(2.94)-1.342

O.339

Enlarged Model

LogRT LogRs LogRL LogRd
(L96)
O.064
(O.67)
O.122

(L41)

-O.060(-1.74)(-L91)

-L427

O.381
(4.50)-1.300(-L66)

O.403

O.044

(4.69)(O.62)-O.128

O.097-O.041(-O.87)-O.O07(-O.20)

O.083
O.082

(-L51)(2.74)-3.916(-3.07)-3.306(-1.49)-O.168(-O.95)-O.347(-O.11)

O.465
O.653

O.028.(O.32)(2.83)

O.157(5.85)-O.125(-5.05)-O.071(-1.66)

O.215(4.95)

O.250

O.280

(O.54)(4.61)-1.935(-2.13)-2.096(-2.43)-1.729(-2.20)O.192(1.78)

O.205

(L93)

O.159
(1.50)

O.579

o.o.

o.o.

(L71)

(5.25)
O.494(5.00)O.OOI(O.96)

O.859(10.91)

O.OOI(1.15)(11.98)-O.132

O.OOI(1.07)-O.213(-3.43)-O.048(-O.96)-O.091

O.O02

O.OOI

(Lll)
-O.147 -O.OOI(-2.38)(-O.48)-O.175(-3.00)-O.Oll(-O.31)-O.033(-O.86)-O.052(-O.96)

o.o.

o.
o.
o.o.

o.
o.

O.892

o.o.

O.883

o.
o.

O.407

o.
o.

(IL57)(2.58)

O.O19

O.OO04(O.36)(O.27)

O.897(7.23)

o.o.

-O.172 -O.OOI(-2.49)(-O.43)O.369(2.37)

o.o.

O.749

o.

O.268

O.OO02(O.83)(O.17)-O.060O.OOI(O.64)(8.67)

O.OO02

O.421(4.26)(-L27)
O.041(O.61)

R21s•Ed•zvlP
o.o.

(O.60)(-1.90)-O.O12(-O.27)(3.31)

Log()-i
O.969(8.51)
O.749(6.52)
O.713(6.35)
O.631(6.53)(-L55)

O.O19 -O.114(O.42)(-2.87)(3.25)

O.643

e-O.176 -O.O04(-2.70)(-1.86)
O.OO07-O.087(-2.07)-O.043(-1.15)(3.38)

IR(-L54> (-L59)(4.52)(3.53)

iS-O.259 -O.O03(-2.82)(-1.68)-O.166 -O.O04

O.170(-2.13)(-O.53)-O.148(-O.59)-O.098(-O.37)-3.306Mi{P]-O.164(-3.38)(O.16)-O.070 -O.O02(-2.27)(-L91)-O.055 -O.O02(-L81) (-2.06)-O.038 -O.O02(-O.88) (-1.41)(13.07)

O.617

1.031

o.
o.04

o.
o.
o.10.

(IL95)

1.040(13.76)1.063(12.56)

o.
o.
o.
o.

h

9491.858
O12-O.276
9071.766 895
O13O.039 929
9101.751
O12O.048 376
8571.904
O17O.198 569
8101.865
O17O.317 985
7951.751
O17O.350 646
9781.846
O13-O.192
9771.846 628
O14-O.186
9771.837 668
O14-O.178
4681.827 416
O19O.752 269
8141.937
O17O.225 778
4691.767
O19O.751 359
9611.914
O15O.039 OIO
8851.999
O16O.362 602
7711.893
O17O.579 136
9621.608
O12-O.308
9641.626 056
O12-O.322
128
9641.609
O12-O.323
o.

538

E.N.

V-1

o.

V-2

o.

V-3

o.

V-4

o.

V-5

o.

V-6

o.

V-7

o.

V-8

o.

V-9

1.

V-10

o.

1.

V-11

V-12

o.

V-13

o.

V-14

o.

V-15

1.

V-16

1.

V-17

1.

V-18

x
m
z
-a
:
H
as
:
N
a
>
x
-

TabEe 8.

Log(M
p3 )

61•M--•69-IY

70•I--79•rv

6I•M-73•rv

const

Logy

LogRT LogRs LogRL LogRd-O.491(-1.88)-O.515(-1.99)-O.561(-2.11)-1.063(-2.13)-1.085(-2.12)-1.329(-2.06)-O.204(-1.64)-O.164(-1.31)-O.337(-2.13)

O.181(2.46)-O.467

1.115(O.88)

74•I--82•rv

61•M-75•IV

O.176-O.042(2.37)

O.280(3.00)(-O.72)-O.077(-2.68)

O.269

O.O13
O.097

O.418

O.061
(1.77)(O.05)-O.076(-3.07)(2.43)-O.407(-2.59)-O.563(2.38)(1.13)-O.076(-2.14)-O.O14(-O.44)

O.082(1.28)-O.108(-5.00)

O.165(3.15)(3.19)-O.793(-2.92)-1.507(4.15)

O.497
O.540

(O.94)(4.18)

O.713

O.543
(4.29)

O.756(6.23)(2.00)

O.O02

O.545
(4.23)O.OOI(O.74)

O.945(21.45)

O.O02(2L47)

O.O08

O.O02
(3.08)(16.08)(O.25)-O.OOI(-O.69)O.042 -O.OO03(1.24)(-O.26)-O.042 -O.O02(-O.92) (-L23)
O.047-O.053(-1.06)
O.0427(1.47)

O.029(O.64)
O.024(O.48)

O.912(2.38)

O.060

O.283
(3.98)O.OOI(O.56)(O.85)(2.29)-O.110(-3.97)

O.729(6.51)O.OIO-O.077(-1.67)

Log()-iO.OOI(O.67)(O.31)

O.325
O.114

O.028

(-2.70)O.369-O.086(-L55)

O.037-O.067

O.077(2.22)

O.145(3.21)
O.355(2.96)

O.020(O.46)

O.O03(3.89)

IRe

O.794-O.085 -O.OOI(9.10)(-1.43)(-O.88)
O.817-O.067 -O.OOI(9.725)(-O.89) (-O.74)
O.OO03 O.801-O.087(9.00)(-O.18) (-O.21)(O.32)(-2.53)(2.74)(1.79)(O.80)

O.026(O.40)

O.187(3.48)-1.053(O.86)(2.33)-O.214(-O.174)-2.480(1.47)

76•I--82•rv

M3
l

Enlarged Model ( po.oooo(O.11)

O.237

(L42)

O.438
(2.67)

O.049(O.31)

O.894(15.07)

O.OO03 -O.681(1.61)(O.35)-O.021-O.OOI(-O.59)

O.837(O.83)(-O.32)

O.686(8.97)-O.022 -O.OO04 -O.718(-O.96) (-O.39)(-O.36)-O.O14 -O.OOI -O.068(-O.44) (-O.91)(-O.32)-O.O14 -O.OOI -O.O17(-O.38) (-O.90)(-O.84)

R21S•Ed'wlP h
O.7962.062 O.205
O.O09-O.170
O.9962.625 O.085
O.O09-O.183
O.9962.085 O.287
O.O09-O.233
O.9252.007 O.035
O.O18-O.076
O.9211.977 O.104
O.O18-O.053
O.8701.949 O.262
O.O19O.118 O.Q66
O.9982.019
O.O09-O.285
O.9972.057 O.212
O.OIO-O.29
O.9972.007 O.030
O.OIO-O.226
O.6982.083 1.434
O.O16O.177
O.7792.136 1.642
O.O16O.169
O.6281.937 O.611
O.O16O.329
O.9952.022 O.092
O.O14-O.209
O.9942.014 O.060
O.O14-O.096

O.9891.953 O.212
O.O15O.099
O.8481.674
O.OIOO.160
O.8141.602
O.OIOO.224
O.8331.587
O.060O.166

E.N,
vr-1

vr-2

W-3
:v

W-4
vr-5
vr-6
vr-7
vr-8

vr-9
VI-1O

W-11
va-12
VI-13

ii

eE
:3
9i

z

W-14
V[-15

Å~

VI-16

Å~

W-17

Å~

:

vr-18

EB

Table 9.

STD)
Log(p

const

Logy

LogRT LogRs LogRL LogRd-O.460O.100-O.029(-O.35)(-1.08)61•M---69•IV

70•I-79•rv

61•M-73•IY

74•I--82•rv-O.479O.109(1.46)(-L34)(1.68)-1.278

O.297

O.140

(-1.93)-1.225(-1.89)(2.59)-1.609

O.380

O.278
(3.e4)-O.109

O.333(-O.51)-O.194(-O.87)-O.627(-2.13)(O.87)

2.458

O.196

(2.10)

-L057
3.228

-O.079(-L78)-O.108(-3.51)-O.104(-1.89)O.227(3.34)

O.215

O.236

(L87)

O.228
(2.08)-O.O09(-O.25)-O.035(-O.69)

O.066

O.966

O.O02

O.082
(2.54)
O.102(2.98)-O.O02(-1.59)-O.O02

O.742(6.26)

O.626(4.82)

O.922
O.856

(21.66)

O.224

(L45)

O.310

(-L35)(1.99)-O.O03(-1.77)

O.139

O.064

O.OO02(2.11)(O.21)(O.88)

O.928(20.58)

O.060

O.OO03(1.87)(O.27)(19.70)O.031(O.79)O.OOI(O.77)(15.38)O.087(2.485)-O.O02(-1.58)-O.O02(-1.45)-O.OOI(-O.87)(2.56)-O.066

O.OO02(2.43)

O.099(-L12)

O.711(6.02)

(L55)

(L06)

O.141
(2.81)

O.OOI(1.04)O.OOI(O.98)
O.O02(1.90)(28.66)(O.53)-O.101(-3.85)

O.626(4.82)

O.OOI(1.72)(1.056)

2.848
3.098

-O.327(-1.10)O.904(15.12)

O.089(1.96)-O.122(-2.53)

O.916(14.26)(28.45)

O.048

O.085

Log()-i(O.18)

O.034(1.73)

IRe(2.43)

O.135(1.56)(2.66)-O.098(-2.89)O.237(2.30)(2.05)

O.109

O.156

1.593
(1.16)

O.045(1.10)-O.118(-3.41)(3.24)(L71)(-2.75)(O.83)-O.037 -O.021(-O.50) (-O.39)

O.067(1.86)(-1.42)-O.655(-2.37)

O.033-O.101(-2.58)(1.72)N"-O.OOO04 -O.O02(-O.53)(-O.69)O.026
O.O02-O.058(O.27)(-O.51)(-O.85)
O.0235 -O.OOI-O.073(O.33)(-O.82)(-O.34)-O.075(-2.34)(2.44)(-2.17)-O.37476•I-82•rv(1.34)(-1.102)-O.6213.512(2.43)

61•M--75-IV

Enlarged Model

O.123(2.61)

O.884
O.812
O.049

(O.27)

O.082(O.46)

O.056(O.32)

R21S•Ed'zvlPhO.9962.096 296
O.O14-O.269
O.9962.065 202
O.O14-O.241
O.9962.116 359
O.O14-O.257
O.9461.960 185
O.020-O.075
O.9481.917 383
O.O14-O.084
O.9281.956 235
O.022O.160 339
O.9982.097
O.O13-O.332
O.9972.097 352
O.O13-O.296
O.9972.088 321
O.O14-O.257
O.7282.182 302
O.181O.053
O.7582.220 L 627
O.O18O.O17
O.6902.062 508
O.O18O.121
O.9962.062 249
O.O17-O.245
O.9962.044 176
O.O18-O.184
O.9942.059 181
O.O19-O.120
O.7611.788 610
O.613O.201 390
O.7781.802 L
O.O13O.169 340
O.7971.810 L
O.O13O.138
o.

o.

o.
o.

o.

o.
o.

o.

o.

1.

o.

o.

o.

o.

1.

E.N.
vr-1

vr-2
vr-3
vr-4
vr-5
vr-6
vr-7
vr-8
va-9
vr-10
vr-11

vr-12
vr-13
vr-14
vr-15

W-16
vr-17
va-18

xtu
Z
-a
:
-as
:
-a
>
x
-

STABILITY OF THE DEMAND FOR MONEY
AUSTRALIAN EXPERIENCES

25

Table le. Chow Test (Enlarged Model)

STD
Rs

M3

M,
Rs

RL

2.30'

2.53*

1.12

74•I---82•rv

Fma 3.07** 3.98'

2.77*

4.15** 3.70"* 5.43** 5.70** 4.61** 5.55**

61•M--75•IV
76•I•-82-rv

Fre 6.35** 3.88** 3.57** 4.43** 2.34'

RT
61•M--69•IV
70•I--79•rv
61•M-•73•IY

Fma 2.28'

RT

Rs
O.71

RL
1.04

1.88

RT
1.11

O.87

3.54** 2.23'

RL
1.00

2.37'

' significant at 5 % level" significant at 1 % level(7) The degree of stability of M3 and Mi are not so different, but the former seems tohave higher stability, in a minor degree, than the latter on the basis of the

RMSPE and chow test. However, M3 is composed of Mi and STD, the sign andvalue of coefficient of R of regression equation have some ambiguity.

Reference[ 1 ] Artis, M. J. and Lewis , M. K., "The Demand for Money in the United Kingdom,

1963-1973", Manchester school, vol. 44, June 1976, pp. 147-81.
[ 2 ] Boughton, J. M. "Recent Instability of the Demand for Money : An International
Perespective", Southern Economic Journal, vol. 47, No. 3, Jan. 1981, pp. 579-597.

[3] Chow, G. G., "Test of Eqality Between Sets of Coefficients in Two Linear
Regressions", Econometrica, vol. 28, No. 3, July 1960, pp. 591-605.
[4] Davis, K. T. and Lewis, M. K., Monetary Poliay in Australia, Longman Cheshire,1980.
[ 5 ] Friedman, M., "The Quantity Theory of Money-a Restatement", in Stndies in theS2uantitN Theory of Money, edited by M. Friedman, Uni. Chicago Press, 1956.
[ 6 ] Goldfeld, S., "The Demand for Money Revisited," Brookings papers on Economic

Activt'ty, No. 3, 1973, pp. 577-631.

[7] , "The Case of the Missing Money", Brookings Papers on Economic
Activt'ty, No. 3, 1976, pp. 683-739.
[ 8 ] Goodhart, G. A. E., "Problems of Monetary Management : the V. K, Experience",
in Inflation, Dopression and Economic Policy in the IPVest : Lessons from the 1970's,

edited by A. S. Courakis, Oxford, 1978.

[9] , Monetary Theory and Practice : U. K Erpen'ence, Macmillan, 1984.
[10] Hamburger, M. J., "The Demand for money in an Open Economy : German andUnited Kingdom", Journal of Monetary Economics, vol. 3, No. 1, Jan. 1977, pp.

25-40.
[11] Jonson, P. D. Moses, E. R. and Wyman, C. R., "The RBA 76 Model of the26 KENICHI ISHIGAKI
Australian Economy", in Conference in Applied Economic Research, Reserve Bank ofAustralia, Dec., 1977.

[12] Judd, J. P, and Scadding, J. L., "The Search for a Stable Money Demand
Function : A Survey of the Post-1973 Literature", Journal of Economic Literature,

vol. 20, Sep. 1982, pp. 993-1023,[13] Kaldor, N., "The New Monetarism", Llaytis Bank Reviezv, July 1970, pp. 1-18.

[14]Laidler, D., The Demand for Money .' Theories and Evidence, sec. ed.,Dun-Donnelley,1976.
[15] -, "The Demand for Money in the United States Yet Again", on The State ofMacroeconomics .' Carnegre-Rochester Conference Series, ed. K, Brunner and A, H.

Meltzer, vol. 12, North-Holland, 1980, pp. 219-71.
[161 Laider, D. and Parkin, J. M,, "The Demand for Money in the United Kingdom,
1955-1967 : Preliminary Estimate", Manchester school, vol, 38, Sep. 1970, pp.

187-208.
[17] Lewis, M.K,, "Interest Rates and Monetary Velocity in Australia and the UnitedStates", The Economic Record, vol. 54, No. 145, Apr, 1978, pp. 111-126.

[18] Norman, P. and Purvis D. D., "The Behaviour of Monetary Aggregates inAustralia , Some New Evidence", The Economic Record, vol. 53, No, 142,
June/Sep. 1977, pp. 364-389.

[19] OECD, "Demand For Money in Major OECD Countries", OECD Economic
Outlook : Occasioual Stndies, Jan. 1979. pp. 35-57.
[20] Theile, H., PrinciPles of Econometrics, John Wiley & Sons, 1971.
[21] Pindyck, R. S. and Rubinfeld, D. L., Econometric Models and Economic Forecast,second ed., McGraw-Hill., 1981.

[22] Tsutui Y. and M. Hatanaka, "Stubility of Demand for Money Function in Japanand U.S.A.", (in Japanease), GendZii-Kelzai, 50. 1982 pp. 124-135.

"EMPIRICAL STUDY OF CHANGES IN ACCOUNTING POLICY"
IN THE CASE OF JAPANESE ENTERPRISES
Hidetoshi YAMAJI

I

Accounting information is generally useful for achieving some socially desired
targets. For example, income distribution, resource allocation including capital
allocation in security markets and observation by the public of firm's behaviors canbe carried out effectively by using accounting information.
But in spite of its usefulness the content of accounting information is somewhat
vague because it can be calculated in different ways, depending upon alternative, but
acceptable, accounting policies, According to the trial of Chambers we can calculate

about 30,OOO,OOO profit numbers in cornpliance with "the Generally Accepted

Accounting Principles".i) Essentially the diverse meanings of accounting
information is a moot issue but it does not reach the point of destroying the current
institution of accounting measurement and reporting because of the existence of "thePrinciple of Consistency".
Attention is briefly paid to the case of Japan. As it is known, there are many
alternative accounting policies which are all permitted by "Kigyou Kaikei Gensoku",
And it is also known that "Kigyou Kaikei Gensoku" has the Principle of Consistency
which requires the consistent use of accounting procedures and prohibits arbitrary

changes of them. It is, however, accepted that exceptional changes of accounting
procedures can be made when there are plausible reasons ; but this is sometimes
criticized extensively. Judging from these affairs, it is still possible for businessenterprises to formally change their accounting procedures for the purpose ofmanipulating their accounting information,

Our main concern in this paper is the question why firms make the changes,
because accounting information has a very important role in modern society. If we can
not answer this question, we must reduce the extent that we are now depending on it.

In section ll , a review of previous studies concerning changes in accounting
policies will be provided. In section M, an analysis based on Japanese enterprises
will be made statistically for preliminary fact finding. In section IV, two kinds of1) R,J.Chambers, "A Matter of Principle", The Accounting Revi'ew, Vol, XLI, No.3, (July, 1966),

P,455.

HIDETOSHI YAMAJI

28

hypothesis will be tested for explaining the phenomena of accounting policy changes.

Section V concludes our ahalysis.
ll

H-1 Review of preyious studies
At first, descriptive theory trying to explain accounting policy changes was presented

as the income smoothing hypothesis ; it did not necessarily criticize themisrepresentation of accounting information caused by the changes. It is often said
that the dividends paid by modern big businesses become substantially interest. This
inclination, in turn, forces firms to pay their dividends like interest. But the profits offirms extensively fluctuate every periods, so that if a firm produces a excess profit itwants naturally to accumulate the excess part of the profit for paying the dividends insubsequent periods. But according to the GAAP and "Kigyou Kaikei Gensoku", it isrequired that firms should accumulate the profits only after paying the normal
corporate taxes. But for firms it would be much better to accumulate the extra profits

without paying taxes than to do with paying them, which is of course against theaccounting rules but is understandable from the viewpoint of firm's motivation. Thisis one of the reasons that the income smoothing hypothesis was theoretically
accepted,

M.J.Gordon first presented the income smoothing hypothesis, asserting thatmanagers selected accounting measurements and reporting rules for the purpose ofsmoothing reported profits.2) In analyzing the changes of accounting policies
empirically, he adopted the Investment Credit as a variable of accounting policy. He

examined the correlation between the treatment of the item and the extent of incomesmoothing but in vain. After Gordon, R.M.Copeland selected as an accounting policy

variable the investment account reflecting the amount of investment inunconso!idated related firrrss when making consolidated financial statements.3) But

he did not reach meaningful results.

Reviewing these studies critically, B.E.Cushing continued analyzing thechanges of accounting policies using the income smoothing hypothesis.4) He did not2) M,J,Gordon, "Postulates, Principles and Research in Accounting," The Accounting Revi'ezv Vol.
XXXIX, No. 2, (April, 1964). M,J, Gordon, B. Horwitz and P.Meyer, "Accounting Measurements andNormal Growth of the Firm", contained in Research in Accounting Measurement (Jaedick et al, AAA,
1966),
3) R.M.Copeland, "Income Smoothing", Empirical Research in Accounting : Selected Stuciies, 1968.

R•M.Copelahd and R,D.Licastro, "A Note on Income Smoothing", The Accounting Revt'ew, Vol, XLIII,
No,3, (July, 1968).

4) B.E,Cushing, "An Empirical Study of Changes in Accounting Poiicy", Journal ofAccounting
Research. Vol, 7, No.2, (Autumn, 1969).

"EMPIRICAL STUDY OF CHANGES IN ACCOUNTING POLICY" 29
IN THE CASE OF JAPANEASE ENTERPRISES

specify any accounting policy variables. The question was whether the firms
manipulated the accounting procedures to realize a target EPS (Earning Per Share).

He showed that about 6196 of the changes of accounting policies had the incomesmoothing effect, and 76% of them had the effect of increasing the reported income(EPS). He concluded that, while it was impossible to clarify the structure of decision

making itself concerning the change of accounting policy because of the long-term
payoff of its effect, managers selected actively the timing of changing the accounting

policy to represent the reported EPS in a good manner,
Subsequently we can find a different research viewpoint. Typically it is pointed

out that M.L.Gosman tried to find the particular characteristics of firms which hadchanged their accounting policies.5) The viewpoint of Gosman seems to be based
upon the reflection on the previous hypothetical approaches. Gosman studied thecorrelation between the change of accounting policy and three characteristics of firm :the size of the firm, the industry and the accounting firm auditing the firm concerned.
His statistical technique was the test of classification using chi-square. He concluded

that there was correlation between the likelihood of changing accounting policies andthe size of firm and that the Price-Waterhouse, the Librant and the Montgomery
suggested more frequently changes of accounting policies than another accounting

firms. But he denied any relationship between accounting policy changes andidentification with a particular industry.

Next, E.B.Deakin and Cushing criticized the work of Gosman from the viewpointof statistical technique.6) They asserted that the chi-square test of classification was

insufficient to verify the correlation between the change of accounting policy and thesize of firm, while they supported the use of the Mann-Whitney U Test. They pointed
out that there was no correlation between accounting policy changes and the size offirms in adopting the same data used by Gosman. Similarly, they suspected theconclusion concerning the relationship between the accounting policy changes andthe industry, and the one between the accounting policy change and the accounting

firm, so that they independently tested the two correlations by employing the
Kruskal-Wallis Test and more strongly concluded the same results as the ones ofGosman.
The study of C.S.Warren deserves being reviewed because he collectedcross-section data and used a different statistical technique, ANOVA.7) He found that

5) M,L.Gosman, "Characteristics of Firms Making Accounting Changes", The AccountingReviezv,

Vol,XLVIII, No. 1, (July, 1973),

6) B.E.Cushing and E.B.Deakin, "Firms Making Accounting Changes : a Comment", The
Accounting Reviezv, Vol. XLIX, No. 1, (January, 1974). They criticized the contingency table used by

Gosman and asserted to employ the non-parametric method for taking the information concerning therank size into account.

HIDETOSHI YAMAJI

30

accounting policy changes were meaningfully related to the size, the industry and therecognition of extraordinary items. W.G.Bromser pointed out that firms which had

relatively worse EPS and ROI more often changed their accounting policies tomanipulate the accounting information and to report their operating results in a good8)manner.

Recently we can find a new hypothetical approach which is proposed by
G.L,Salamon and E.D.Smith,9) They gave attention to the fact that the big firms
whose EPS were bad and whose reputation in the securities market was also bad hadstatistically more often an inclination to change their accounting policies than therelatively small firms. In addition, they adopted agency theory and used theassumption that the management-controlled firms more often made changes ofaccounting policies than the owner-controlled firms in the years that the reputation of

the firm by the stockholders were bad, The first procedure for verifying thisassumption was dividing firms into two groups : management-controlled andowner-controlled group. Of course the distribution of firms over different industries

was statistically adjusted, The next step was counting the numbers of firm in eachgroup in terms of whether they changed accounting procedures. Then they could use
the chi-square test of independence. The result was that the management-controlledfirms more often changed their accounting policies. In addition they pointed out thatthe management-controlled firms had many more changes in the years that theircumulative abnormal returns (CAR) were minus. They were .calculated from the twoparameter CAPM and seemed to represent the evaluation by stockholders of firms.

These results seemed to verify the hypothesis presented by Salamon and Smith.
ll-2 Some issues of previous studies
As we have already seen, the previous studies have not conclusively identified thedeterminants of accounting policy changes. So in this section some issues of previous

studies should be pointed out for the purpose of contrasting our research mothodology,First, the idea that some firms change their accounting policies to adjust theiraccounting profit numbers to the desired numbers was central in the works of Gordon
and Copeland. The desired profit numbers used in their papers were calculated from

relatively simple expectations models, These are as follows :iO)
7) C.S,Warren, "Characteristics of Firms Reporting Consistency Exceptions-A Cross-section
Analysis", The Accounting Revt'ezv, Vol. LII, No. 1, (January, 1977),
8) W.G.Brornser, "The Earnings Characteristics of Firrns Reporting Discretionary Accounting

Changes", The Accounting Reviezv, Vol, L, No. 3, (January, 1975).
9) G,L,Salamon and E.D.Smith, "Corporate control and Managerial Misrepresentation of Firrn
Performance", The Bell Journal of Economics, Vol,10, No, 1, (Spring, 1979),

10) R.M.Copeland, op cit. , pp. 542-543,

"EMPIRICAL STUDY OF CHANGES IN ACCOUNTING POLICY" 31
IN THE CASE OF JAPANEASE ENTERPRISES

Y,= a Yt+(1-a) Y, -i (a: constant, 05 aS1)
Y t=Olt-i+Dt-i (Yt: smoothed EPS, OIt: operating income, D,: dividend)
These expectations models assume that the managers can change accounting policies
to adjust accounting information to the short-term trend of accounting number (EPS).
In these models the time-horizon considered is only two terms. In contrast, we assume

a longer period in order to identify a stronger trend.
Second, factors other than size, accounting firm concerned, industry and control

status should be tested.
Finally, the sample used in empirical studies should not be limited to the changes

on which the auditors made qualifications in their auditor's reports, because theauditors and the accounting firms seldom make qualifications against the financial
statements of relatively large corporations and more often do them against the ones ofrelatively small firmsii) When they judge whether the destruction of "the principle ofConsistency" should be reported in the financial statements, they usually take theirown interests into account and they think that it is less necessary to qualify thefinancial statements of large firms because of the stability of their managements. In
considering these factors we must take all cases of changes in accounting policy into

account whether or not these changes are subject to the auditor's qualification,m
M --1 Methodology of empirical study
In this section we will report the results of two kinds of empirical studies. One is thetime series analysis which aims to make clear whether the firms changing depriciation
procedures adjust their current profit numbers to their long-term profit trends. The
other is cross section analysis which aims to find some factors affecting the changes

in accounting policy (depriciation method).
First, we discuss the time series analysis. As the first step, 50 firms were selected

randomly from the firms listed in the first part (Ichibu Joujou) of The Tokyo
Securities Exchange. These firms had changed the procedure of depriciation (oftangible assets) at least one time in the period from 1965 to 1980. 0ur assumption isthat the firms adjust their current incomes (gross operating incomes) to the target
trends of them by manipulating the procedures of depreciation. But in contrast withthe method adopted by Copeland and Gordon the target trends of income isselectively calculated from ten kinds of trend models according to the least standard

residuals. And these trends extend from 1965 to 1980 for the purpose of taking the11) F, Newman, "The Auditing Standard of Consistency", Empirical Research in Accounting ;Selected Studies, 1968,

HIDETOSHI YAMAJI

32

time-horizons of Japanese managers decision makings for changing accounting
policy. The ten trend models are as follows :i2)

Yt ==a + bt Yt =a + bt +ct2 Yt =a + bt + ct 2+ dt3 Yt =abt Yt =abtct2
Yt =abtct 2dt 3 Yt = at !(b +t) Yt = Ke-l Yt = Kab ' Yt = Ko /(1+ me- a' )As the second step we must test whether the years that firms made changes areincluded in the upper ranks of years that the current gross operating incomes are far
from the best trend of them. Then 15 years (1966 to 1980) are classified into five ranks

according to the degree of difference between the real gross operating income and theestimated trend. And the sample firms changing their depreciation procedures werecounted in each rank of years. If our assumption is the case, there should be more
occurrences of changes in accounting policy at least in the upper two ranks than in theother ranks.

Second, we discuss the cross-section analysis. The discriminant analysis was
adopted to find some plausible factors which induced firms to change their accounting

policy. The sample used in this analysis consists of two parts. One was randomly
selected from the firms which were used to close their accounts in March and changed

the procedure of depriciation from 1976 to 1978. The other was also randomly
selected from the firms which end their fiscal year in March and didn't change in thesame period. This selective procedure yielded 45 firms and 115 firms respectively.
Explanatory variables are concretely as follows : the amount of tangible fixed assets(Xi), the capital (X2), the gross amount of sales (X3), the amount of depriciation of
tangible fixed assets (X4), the degree of difference between the real operating income

and the best trend of income (Xs) and the cumulative abnormal return (CAR) (X6).
Ill -2 Results of analysis

The result of time series analysis is shown in Table 1.

Table 1.

RANK OF THE DEGREE
OF DIFFERENCE
BETWEEN THE REAL NUMBER OF FIRMS
AND THE BEST TREND
1

12

2

16

3

10

4

15

5

12

12) S,Tamino, "Simple & All-round Techniques for Linking Analytical and Statistical
Subroutines"." contained in Studies in Studies in Contemporary Information System, (in Japanese),

Research Institute for Economics and Business Administration, 1976, p. 146.

"EMPIRICAL STUDY OF CHANGES IN ACCOUNTING POLICY"33
IN THE CASE OF JAPANEASE ENTERPRISES
The data in Table 1 is susceptible to be statistically analyzed by the chi-square

test, We can conclude that there is no correlation between changes in depreciation
procedure and the degree of difference between the real number of gross operating
income and the estimated number of best trend because of w =1.8 (Xg.os(4)=9. 49).

So we must look at the results of cross-section analysis. The discriminantfunction (F) derived from discriminant analysisi3) is as follows ;F=O.22477Xi-O.33642X2+1.70728X3-1.58295X4-O.04066Xs+O.30406X6.
When the discriminant score of a firm is minus, the firm is considered as a firmchanging the depriciation method. Of course when the score is plus, the firm is judged

as the firm not changing it. The coefficients represent the degree of contribution to
the discrimination of six variables. The degree of difference between the real and theestimation (Xs) clearly doesn't contribute to the discrimination, which is consistent
with the result of time series analysis. Of interest is the fact that the firms of which

capital (X2) is large and the CAR is minus are considered as the firms changing theaccounting method. Moreover, there is an inclination that the firms of which the grossamount of sales (X3) is large and the cost of depreciation concerning the tangible
fixed assets (X4) is relatively small do not change the procedure. These results areunderstandable but the fact that the effect of the amount of tangible fixed assets is

contrary to the one of the capital may suggest the limitation of our discriminant

analysis. The effectiveness of discrimination is about 70%.
Judging from our results we can conclude that the firm of which the capital islarge and the operating performance is relatively bad and the reputation by thestockholders (which is measured in terms of CAR) is bad more often changes theaccounting policy. The next section will show two hypotheses concerning theabove-mentioned results,
rv

IV-1 First hypothesis and its empirical test
In this section two hypotheses are presented and empirically tested to understandreasonably the fact that the large firm of which the operating performance is relatively

bad and the reputation by the stockholders measured in terms of CAR is also bad more

often changes the accounting policy. First hypothesis is based on the relationshipbetween the capital increase and the changes in accounting policy. Second
hypothesis is based on the relationship between corporate control status and changes

in accounting method.
13) Statistical package (SPSS) was employed,

HIDETOSHI YAMAJI

34

We discuss the first hypothesis, The fact that the reputation by stockholders of a

firm is relatively bad means the lower security return of the firm than the expected

one. This inclination enforces the manager to adopt some policies which improve theoperating result. But as an alternative of management policy, the manager may use theeasy means to achieve rapidly good operating result. That is a change in accounting
policy. In particular, the manager should change the accounting methods when he isinduced to increase the capital of his firm by issuing new securities. It is hypothesizedthat the firm of which the CAR is minus and the plan to increase the capital is urgent

more often changes accounting methods than the firm which does not have any plan toincrease the capital in the near future.

For verifying the hypothesis, we selected 31 sample firms of which the CAR was

minus and which did change the depreciation method and 57 firms of which the CAR
was also minus and which did not change it from the sample firms employed in section

3. Next we classified each sample firms into two groups whether firms concerned

increased the capitals within three years from the year that they changed theaccounting policy. The result of this analysis is shown in Table 2,

Table 2

NUMBER OF FIRMS
INCREASED CAPITALNUMBER OF FIRMS
CHANGEDDEPRICIATION METHODNUMBER OF FIRMSNOT CHANGED
DEPRECIATION METHODNUMBER OF FIRMSNOT INCREASEDCAPITAL

17

14

36

21

Judging from the statistical analysis (w!i -O.084, a=O.05), there is no
inclination that the ill-performing firms which have a plan to increase the capital more

often change the accounting policy than ill-performing firms which do not have a plan

to.do so.
IV-2 Second hypothesis and its empirical test
The agency theory is introduced to set up the second hypothesis to understand thefact that the firms of which the capitals are large, the operating results are relatively

bad and the reputation by the stockholders are bad more often change the accounting
policy, The results of testing the hypothesis will be shown in contrasting Japanese14) Emprical data used in the following description were quoted from the above mentioned paperof Salamon and Smith.

"EMPIRICAL STUDY OF CHANGES IN ACCOUNTING POLICY" 35
IN THE CASE OF JAPANEASE ENTERPRISES

firms with American firms.The analysis is based on the one by Salamon and Smith.i4)

A large firm is usually controlled by managers. And managers have considerable
discretion in guiding the affairs of the firm. This discretion is used for achieving
managerial goals, not those of stockholdgrs. So other conditions being equal, the firm

controlled by managers may operate less efficiently. The managers of ill-performing

firms must exercise discretion over the accounting inforniation in a manner which

may misrepresent firm performance to conceal their inefficiency from thestockholders. This is agency theory ; by adopting this theory we can consider
accounting policy changes as the manipulation of accounting information by the
manager of large corporation. This is our second hypothesis,
For testing the second hypothesis we took the following procedures,

1)The sample firms are classified into two groups which consist of the
management-controlled and owner-controlled,
2) We select firms which experienced accounting policy changes.
3) The reputation by the stockholders is measured in the years that the firmchanged accounting procedure.
4) Unexpectedness of the earnings of firms made by the informational manipulationis measured in the years that the firm changed it.
5) Whether managers discloses the misleading information to the stockholders
investigated by comparing the result of 3) with the one of 4).
First, the criteria by which the sample firms are classified into two groups iswhether 10% or more of the voting stock of the firm is owned by any one party. A firm

was classified as management-controlled if no single block of stock greater than 5%
was controlled by any party, Whether any party exercises active control on the boardof directors is also taken into account, The firms of the United States were required tomeet these control criteria for each of the years 1954-1962. From 10-K and thedefinitive proxy statements each firm filed with the SEC are examined to verify thatthe ownership position reported in 1954 was maintained through 1962. Substantially
we refered to the work of Professor Miyazaki i5) when classifying the sample firms ofJapan to obtain the Japanese sample for each'of the years 1965-1976. The sample wasbalanced with respect to industry. These procedures yielded 32 firms which met thecriteria for manager control and 32 firms which met the criteria for owner control in
the case of the United States. 26 firms and 27 firms are obtained respectively in thecase of Japan.
Second, accounting policy change data for the United States are as follows : thedecisions to change an accounting method which resulted in an auditor's consistency15) G.Miyazaki, Industrial Concentration in JaPan After the World War ll (in Japanese), The Nihon

Keizai Shinbunsha, 1976, chapter, va,

36 HIDETOSHI YAMAJI
qualification, the decisions to make an accounting change because of a changed
condition and the decisions to recognize an extraordinary gain or loss. These data

were obtained from the annual reports and from Form 10-K filed with the SEC from
1954-1962. The same data for Japan were selected from the financial data file madeby the Japan Kougyou Bank. The 53 Japanese firms all closed their accounts in
March from 1965 to 1976. They changed inventory method or depreciation method orrecognized an extraordinary gain (or loss) which amounted to 1/3 of the current net

income before tax.
Third, we discuss how to measure the reputation by stockholders in the year thatthe firm changed accounting policy. The residual (CAR) calcuiated from CAPM or
Market Model was employed as a proxy of the reputation. In the case of the UnitedStates, the residual of CAPM was calculated as follows :Ri,,=7o,t+7i,t'Pi+ei,toCARi,t= 2 ei,t
where

t=-11

Ri, t=:return on security i during month t7o,t=return on the efficient (minium variance) portfolio whose return is
uncorrelated with the return on the market portfolio (R m,t)
7 i,t= R m, t-7o, t

ei, t=abnormal return on security i month t
Bi=ratio of the covariance between R i, t and R.,t to the variance of R.,t(also called systematic risk of firm i)

In the case of Japan the residual of Market Model was used as follows:
Ri, ,=ai+Bi R .,, +ei,toCARi, t= 2 ei, tt=-5R.,t=return on the market portfolio during month twhere R i, t, Pi,ei,thave the same meanings as the ones of CAPM. The fact that
CARi, , is minus means a bad reputation by stockholders of firm i. The plus CAR
means the good reputation. It is interpreted that a firm changing the accounting policy

at t ==O has the desire to improve the bad reputation by manipulating the accounting

profit number. Such a inclination may appear in the firms controlled by manager
according to our hypothesis.

Fourth, we must devise the means of measuring the result of informational
manipulation. It is the unexpected earnings ( UE) that we can use as the means ofmeasuring it. The UE of firm at the closing month where the accounting policy waschanged is the result from manipulating the accounting number. Unexpected earnings

POLICY""EMPIRICAL STUDY OF CHANGESINACCOUNTING
IN THE CASE OF JAPANEASE ENTERPRISES

37

is calculated from the following procedure ;UE=E(Y,)-Y,
where
E( Yt) =expected value of accounting profit
Y, =real value of accounting profit
The. real form of E( Y,) employed in this study isE( Y,)= Y,-i,
In the case of the United States Ytis earnings per share ( EPS). In analyzing the dataof Japanese enterprises Yt is current operating income in the case of the change ininventory method and in depriciation method, and is current net income before tax inthe case of a large amount of extraordinary gain (loss). The sign of UE means
unexpecteness of accounting information. The fact that the CAR of firm i is minus

means a bad reputation by stockholders of firm i. If the manager of firm iyields

unexpected accounting information <accounting profit number) by changing theaccounting policy arbitrarily, it may be possible that the stockholders of firm i alter

their evaluation about management ability. So according to our second hypothesis thesigns of CAR and of UE of management-controlled firms are more often different fromeach other in accounting policy change years than owner-controlled firms.
Fifth, a chi-square test using a 2Å~2 contingency table was used to test the null

hypothesis that there is no difference between management and owner controlledfirms in the proportion of accounting policy change years in which there isconsistency in the sign of UE and CAR The results presented in Table 3 is consistent

with the informational manipulation hypothesis in that the proportion of accounting
policy change years in which the signs of UE and CAR are the same is significantly
lower for management-controlled firms of the United States than for owner-controlledfirms of the United States (significant level O.10). But the evidence of Japan didn't

reject the same null hypothesis (significant level O.10).

Table 3. CONTROL STATUS OF FIRMS AND CONSISTENCY IN THE SIGNS OF UNEXPECTEDEARNINGS (UE) AND CUMULATIVE ABNORrviAL SECURITY RETURNS (CAR)

JAPAN
USA
STATUSCONTROL
CONTOROLSTATUS
MANAGEMENT- OWNERMANAGEMENT-OWNERCONTOROLLED
CONTOROLLEDCONTOROLLED
CONTOROLLEDSIGNS OF CAR
AND UE IN

ACCOUNTINGPOLICY CHANGEYEARS :
NO. OF CON-

61

56

20

22

NO. OF INCON-

42

23

6

5

SISTENT CASESSISTENT CASESHIDETOSHIYAMAJI

38

The next procedure is to test the hypothesis for management and ownercontrolled firms that there was no difference between the security return performanceof a firm in the year 1954-1962 sample period of the United States and in the year
1965-1976 sample period ofJapan. A Chi-square test was also employed. In the caseof the United States the evidence presented in Table 4-1 is consistent with theinformational manipulation hypothesis in that there is no significant association
between the timing of accounting policy changes and security return performance forowner-controlled firms, but there is a significant association for managementcontrolled firms (significant level O,05). But in the case of Japan (Table 4-2) there are

significant associations both for management controlled firms and owner controlledfirms (significant level O.05).

Table 4-1. ACCOUNTING POLICY CHANGE YEARS AND CUMULATIVE ABNORMAL SECURITY RETURNS (CAR) 1954-1962 (USA)MANAGEMENTCONTROLLEDOWNERCONTROLLED
FIRMS

FIRMS

SIGNOFCAR

SIGNOFCAR+

MEMBEROF
POLICYCHANG'

-

44

59

39

4e

YEARS
OTHER YEARS

107

76

110

96

E

Table 4-2. ACCOUNTING POLICY CHANGE YEARS AND CUMULATIVE ABNORMAL SECURITY RETURN (CAR) 1965-1976 (JAPAINI)MANAGEMENTCONTROLLEDOWNERCONTROLLED

POLICY CHANGEYEARSOTHER YEARS

FIRMS

FIRMS

SIGNOFCAR

SIGNOFCAR

+

'

+

-

24

28

27

38

34

18

39

26

Judging from the above mentioned evidence the hypothesis based on agency
theory fits the cases of American firms but does not fit to the cases of Japanese firms.

In the United States, the management-controlled firms more often change theaccounting policy in the years that the reputations by stockholders are bad thanowner-controlled firms, In Japan both management-controlled firms andowner-controlled firms have an inclination to change the accounting policy in theyears that the security return performance are bad (which meant the bad reputation by
the stockholders).

"EMPIRICAL STUDY OF CHANGES IN ACCOUNTING POLICY" 39
IN THE CASE OF JAPANEASE ENTERPRISESv
The following facts concerning changes in accounting policy were pointed out inthis empirical study.

(1) The large firms both in the United States and in Japan more often change theaccounting policy in the year that the operating results and reputations of the firms
are bad than in the ordinary years. This inclination indicates that the motivation to
manipulate accounting information in the years of dull business is stronger than the

one to do it in the years of brisk business.But it was not for .the plan of capitalmcrease.
(2) The large firms changing the accounting procedures can be considered as
management-controlled firms in the United States based on the agency theory. But•such a consideration could not be made in the cases of Japanese firms. This difference
may be due partly to some statistical issues, partly to the differences of the function of

securities markets and partly to the different degree of maturity of management labour

marketi6)16) E.F.Fama, "Agency Problems and the Theory of Firm", The Journal of Political Economy, Vol,88, No, 1-3, 1980.

AN EMPIRICAL STUDY ON INTERNATIONALSHORT-TERM CAPITAL MOVEMENTS IN JAPAN
Hideki IzAwA

1. Introduction
Recently, the movements of the international capital, especially, short-term capital,
shown in Table 1, have been of much more importance with the rapid liberalization inboth the foreign exchange market and the capital (money) market in Japan. Nowadays,
people have to pay a lot of attention to the effect of the capital flows on exchange

rates and the balance of payments.
In this paper, I try to present a theoretical explanation of international short-term

capital movements and some empirical results of its determinants.
In section 2, I describe briefly a theoretical framework of determination ofinternational short-term capital movements based on the simultaneous equilibrium

analysis in the spot and forward markets. In section 3, I proceed to estimate
empirically the short-term capital movements function, defined broadly to include
securities investments (from the long-term capital accounts). In the late 60's or early

70's, econ6metric analysis began to be applied to the capital account of somedeveloped countries. Mutoh & Hamada (1984) reported some empirical tests using
monthly data for Japan from 1973 to 1980, I update this analysis in this paper. In
section 4, I conclude by reporting my main findings and some problems to be solved.

2. Theoretical Framework
There are various views on international short-term capital movements. The basic
views are : high interest rates in the U.S.;or the change in interest rate differential
rather than the interest rate differential itself ;the attraction of dollars as a safe asset

in case of emergencies ; the stages theory of the development of the balance of

payment (i.e. Japanese economy as young creditor) ; and so on.
Tsiang (1959) pioneered a rigorous theoretical framework with the integration of
the spot and forward exchange rnarkets and Hodjera (1973) presented a survey article.

However, it seems that we have not had much theoretical progress since then.

Tsiang-Sohmen classified forward exchange operations according to the"function" of a particular transaction rather than the "person" who undertakes it.
Although real market participants often perform two or more types of these functions,Table 1(u.s.

$ million)

"N

Item

Current

Trade

Balance

Balance

Services

UMequited

Long-

Basic

Short-

Errors&Overall

BalanceGold&

Transfers

Term

BalanceTerm

Omissions

Balanceof

Foreign

CapitalYear

CapitalMonetary

OthersExchange

Exports

Imports

A136 3,688

36,26432,576

A3,510 A314A9,750 A9,886

2,407 A2,595 A10,074 A10,074 A6,119 A3,955

74

A4,693

1,436

54,48053,044A5,842 A287A3,881 A8,574

1,778

75

A682 5,028

54,73449,706

A5,354 A356A272A954A1,138 A584A2,676 A2,676 A703A1,973

9,887

66,02656,139A5,867 A340A984

2,696

A6,O04 A389A3,184

7,734

A7,387 A675A12,389

1973

76

3,680

Moyements Reserves

1,272 A8,111

A865

117

2,924

2,924

3,789

A648

657

7,743

7,743

6,244

1,499

4,145

1,538

267

5,950

5,950

10,171

A4,221

111

77

10,91817,311

79,33362,02278

16,534

24,596

95,634

71,03879

A8,754

1,845

101,232•99,387

A9,472 A1,127 A12,618 A21,372

2,377

80

A10,746

2,125

126,736

124,611

A11,343 A1.,528

A8,352

3,071

81

4,770

19,967

149,522

129,555

A13,573 A1,624 A6,449 A1,679

82

6,850

18,079137,663

119,584

83

20,79931,454145,468

84

35,O0344,257

168,290

2,394

A43A6,839 A6,839

2,333 A16,662 A16,662 A12,692 A3,970

A3,115 A8,396 A8,396

A958

4,905 A13,301
3,171

A5,315

A9,848 A1,381 A14,969 A8,119 A1,579

4,727 A4,971 A4,971 A5,141

170

114,O14

A9,106 A1,549 A17,700

2,055

1,234

3,943

124,033

A7,747 A1,507 A49,651 A14,648 A4,295

Source : Balance of Payments Monthly, Foreign

3,099

23

493 A2,144 A2,144

5,177

5,177

3,743 Al5,200

A15,200

Department, The Bank of Japan, No. 223, Feb, 1985, Summary

Table, pp. 1-2.

1,817 A17,O17

=
H
U
tn
xpt
N
N
>
$
>

AN EMPIRICAL STUDY ON INTERNATIONAL 43

SHORT-TERM CAPITAL MOVEMENTS IN JAPAN

it is convenient, for theoretical simplification, to separate forward market transaction

into (i) hedging-to insure against the risk of exchange fluctuation, affecting
merchants' current foreign trade, (ii) arbitrage-international transfer of spot funds for

short-term investment purposes covered by a simultaneous forward transaction of thesame amount in the opposite direction, and (iii) speculation-taking a net open (short orlong) position with a view to profiting from the discrepancy between the current
forward rate and the expected future spot rate. It is purely a matter of notational

convenience whether the "functional" or the "personal" approach is chosen and will
necessarily give the same results,

The SS-curve in Figure 1 shows the excess supply of spot foreign exchange
caused by payment or receipt in connection with foreign trade and settlement ofprevious speculative commitments in the spot foreign exchange market. The
FF-curve in Figure 1 shows the excess supply of forward foreign exchange derived
from hedging of export-import traders. And the PP-curve shows the excess supply of
forward foreign exchange of speculators and the intercept of the PP-curve with thevertical axis is the expected future spot rate. The QQ-curve shows the horizontal sumof the FF-curve and the PP-curve.
There are some assumptions :1, The covered interest arbitrage holds.
2, The supply and demand for settlement purpose (SS-curve) doesn't depend on the

expected future spot rate.
3. The supply and demand for forward exchange based on speculative motive comesout in the forward foreign exchange market, not in the spot one. The spot
speculation is regarded as the combination of arbitrage and forward speculation,
4. There is only one forward market which has a specified period, for example, threemonth.
The simultaneous equilibrium conditions in spot and forward markets consist of
the following equations.i)1) By solving equations (1)-(3), we obtain the (gross) capital inflow

function ;A,=bo+bl (i,-i *t) +b2•AR +b3•,s,+1+b4•(f,-1 -,-ls,)
where b,==- a .s2 as+(a1 .+sa,4)fa3<>o, b,., -a2(a.1+a4) >o, b2= -(a i+a 4)f
As2-(a l+a 4) fa i

ala2
>o,
b3=
<O, and
b4= 2
AS
AS

fl

A=-(ai+a4) 2-a2-<O, by the stability conditions,

ss

>o,

HIDEKI IZAWA

44

Figure 1
spot rate

forward rate

(\/$)

(\1$)

s

s,

F

P

K

I

E C D

J
d'

A

NQ

M

L

R

d
.

G

B
Q

P
s

s'

F
02

Oi Amount ofexcessof spot(I)

exchange(ll)spot market

Amount ofexcess supplyof forward exchange

supplyforward market

al' (ft -1-t -lst)+AR ,=At +(a 2'st +a 3) ""'"'(1)equilibrium

condition

the demand for the spot

the supply of the spot

for the spot

marketexchange from settle-

exchange from traders'ment of previous spe-settlement

culationa1' (ft -tst +i )+a4' ft +as =At----•---•---(2)equilibrium condition

the suppiy of thethe supply of the forward exchange fromfor the forward market

forward exchange

hedging (FF-curve)

from speculation(PP-curve)

i'=i *t +ft -s,st-•---•---•--••-------•--•--(3)lnterest

rate panty

where s,and f, are the spot and forward exchange rate in the t-th period. tst+i is the
spot rate of the (t + 1) th period expected at the t-th period and given. A is the amountof the spot supply of (forward demand for) arbitrage fund, iand i" are the short-term

interest rate of domestic and foreign country and assumed exogenous. AR is theAN EMPIRICAL STUDY ON INTERNATIONAL 45

SHORT-TERM CAPITAL MOVEMENTS IN JAPANamount of official intervention (purchase) in the spot foreign exchange market, a i •, (i=1,•'',5) are assumed to be positive but a2 or a4 may be negative because of the
J-curve effect (that is because the Marshall-Lerner condition is not satisfied in the
short run).

According to the Tsiang-Sohmen model mentioned above, all international
short-term capital moverhents can be interpreted as being caused by interest arbitrage,

and such international short-term capital flows through interest arbitrage mechanism

finance the deficits or surpluses on the current balance or basic balange.
Now, let us think about the relationship between speculation due to the change in
expectation of the future spot rate and international short-term capital flow. In Figure

2, we assume that the interest rate differential is zero, thereby OiB is equal to 02C
and AB is equal to CD, If people expect the yen/dollar exchange rate to appreciate in
the near future, the PP and OO curves will shift to the right to P'P'and Q'(?'curves

respectively. Both the spot rate and the forward rate will appreciate and arbitrage
fund (i.e. capital inflow) will increase to EG (==HI).
But, as the slope of the SS-curve is very small in the short run, a large amount of
capital inflow (outflow) will not occur, if there is no official intervention into the spot

foreign exchange market.
On the contrary, if the monetary authorities attempt to maintain the targeted spot

Figure 2
spot rate(\1$)

forward rate(\/$)F

s

P
Q

A

B

C

L

J

EG

-!-Z-7--sOi(I) spot market

--

H

QP

P'

D

M

K

zz !
- -p.- F02(ll) forward rnarket

N

- Q'

HIDEKI IZAWA

46

rate, for instance at the level of OiL, to prevent the yen/dollar rate from appreciating,they must purchase dollars by MN minus KL (i.e. JK). The monetary authorities
become the partner of arbitrageurs' transaction in the spot market, so that capital
inflows by MN ( =JL), therefore, the net inflow is the difference between JL and AB

and foreign reserve increases by JK.
Next, let us think about the relationship between the change in the interest rate
differential and the short-term capital flow. In Figure 3, suppose that the domestic
interest rate rises and the interest rate differential becomes wider, so that the spread

between the spot rate and the forward rate changes from d to d'. For the moment, if we

assume that SS, FF, and PPcurves remain unchanged, interest arbitrage inflow fromabroad to Japan becomes advantageous and the spot sale of dollar and the forward
purchase of dollar cause the spot (forward) rate to appreciate (depreciate). The new
equilibrium is reached when the spread (premium) becomes equal to the interest rate
differential again. The amount of inflow of arbitrage funds increases from AB to A'B',
As we mentioned earlier, we can interpret all inflows of short-term capital as thephenomenon brought about by interest arbitrage transaction. However, the covered
interest arbitrageurs need find their transaction partner in both spot and forward
markets. But, we think that the elasticity of demand (or supply) for spot settlementwith respect to the spot rate is very small and may be negative in case of the existence

Figure 3
forward rate

spot rate

(\!$)

(\!$)

F

s

P
Q
C'

G
D'

D
d

B

A

d'

Q

P

A'
B'

s

F

Oi
(I) spot market

02( ll ) forward market

AN EMPIRICAL STUDY ON INTERNATIONAL 47

SHORT-TERM CAPITAL MOVEMENTS IN JAPANof J-curve effect, Then, the effect of the change in the interest rate differential appears

as the change in the spot rate relative to the change in the forward rate and the amountof arbitrage fund hardly changes. Therefore, it is expected that a quick price-adjust-ment happens instead of a quantity-adjustment.

By the way, the Tsiang-Sohmen model mentioned above has some problems.
First, it is basically static and a partial equilibrium model ; the interest rates and the

expected future spot rate are assumed to be given or exogenous. Second, the model
doesn't deal with risk adequately. After all, we still face the difficulty in formulating acomplete and general equilibrium theory of short-term capital movements. At least,
however, it is possible to make interest rates endogenous and introduce a reaction
function of intervention.

3. Empirical Resuks
One of the major questions here is whether international short-term capital movements respond to the interest rate differential or to a change in the interest rate
differential. The former is called the flow approach of short-term capital movements,

and the latter is called the stock approach, consistent with the Tobin-Markowitz
theory of portfolio selection, The stock approach can explain two-way international

short-term capital movements by international asset diversification.
As already pointed out, the Tsiang-Sohmen model is basically a variant of thestock approach and a once and for all change in interest rate differential will generate
only a temporary (net) capital movements, not a continuous flow as in the flow approach.

The pure flow, stock, and stock-adjustment versions of the regression equations
are as follows :ASCt=ao+ai(it-i*t)+a2'rt''''''''"''''''''''''''''a flow approach
SCt=bo+bi'(it-i't)+b2'rt'''''''''''''''''''''''''a stock approach(=I>ASC , == b i • A(it -i', )+ b 2A rt )SC t =:co+ci'(i t- i"t )+c2'rt+c3'SC t -i ''''''''' astock-adjustment approach(=l>ASC , =C 1 • A(i t- i", )+C2'Ar t+ C3'ASC t -1)

ASC,=SC,-SC,-i=co+ci(it-i:)+c2'rt, ifc3=1
where ASC (SC ) is the flow (stock) of the resident's short-term foreign assets. rstands

for speculation or risk but we could not help ignoring this element in our analysi'

because we cannot get the appropriate observable value.
If the coefficient of the lagged value of the dependent variable (c3) is nearly
equal to one, there is a pitfall that we cannot distinguish between the flow approachs

HIDEKI IZAWA

48

and the stock approach. Likewise, if the stock-adjustment spreads over the long

period, we have the trouble that we may identify the two econometrically.
We estimated the following specified regression equations to test the hypotheses

using monthly data during the two periods from May, 1979 (the liberalization of
Gensaki transaction by non-residents) to September, 1984 and from December, 1980

(the enforcement of the new, amended `Foreign Exchange and Foreign Investment
Control Act') to September, 1984, and also using quarterly data from the second

quarter in 1977 to the third quater in 1984. The values of short-term capital

movements are given and plotted in Figure 4.
ASCt=ao+ai(it-i*t)+a2'AR t'''''''''''''''''''''''''a flow approach
ASCt=bi'A(it-i't)+b2'ARt''''''''''''''''''''''''''''a stock approach

ASCt=ci'A (it-i*t)+c2'AR t+c3'ASC t -i ''''''' astock-adjustment approach
The a2 or b2 shows the `offsetting coefficient'.
(Data)ASC : the short-term capital accounts plus securities investment of the long-term

capital accounts, millions of dollar

AR : the change in foreign exchange reserves (=the amount official
intervention into foreign exchange market), millions of dollar

i: the yield of three-month bond trading with repurchase agreement(Gensaki), 96
z': the TB rate, U.S., %(Source) NEEDS (Nikkei) and IFS (IMF)
The results are shown in Table 2,
As we can see in Table 2, it can be said that they are not satisfactory in general,

The values of R2's are very low. This means that the assumed explanatory variables
cannot explain the volatile fluctuations of short-term capital flows. However, theresult seems to be consistent with the conclusion of the Tsiang-Sohmen model ; theinterest rate differential is not statistically significant, but both the change in theinterest rate differential and the change in reserves are statistically significant inregressions (5') and (6) in Table 2.2) The offsetting coefficients are about 1 in (5') and(6). This implies that intervention causes short-term capital movements by about the2) Although I have attempted the estimation using the Almon lag with respect to (the change in)
the interest rate differential, I did not get different results. And I used the actual spot exchange rates, s

t +i or st+3 as the proxy for expectation at the t-th period, assuming rational expectation. The
explanatory variable was statistically significant but the explanatory power was not improved somuch.

AN EMPIRICAL STUDYON INTERNATIONAL
MOVEMENTS IN JAPANSHORT-TERM CAPITAL
Figure 4.

Date
73.03
73.04
73.05
73.06
73.07
73.08
73.09
73.10
73.11
73.12
74.01
74.02
74.03
74.04
74.05
74.06
74.07
74.08
74.09
74.10
74.11
74.12
75.01
75.02
75.03
75.04
75.05
75.06
75.07
75.08
75.09
75.10
75.11
75.12
76.01
76.02
76.03
76.04
76.05
76.06
76.07
76.08
76.09
76.10
76.11
76.12
77.01
77.02
77.03
77.04
77.05
77.06
77.07
77.08
77.09
77.10
77.11
77.12
78.01
78.02
78.03
78.04
78.05
78.06
78.07
78.08
78.09
78.10

The movementsof the short-term

capitalcapital) March,

IS)73 - September,

1984.

Unit :
million-3811.0

dollar385.-25.

oo240.-2.

oo

15. oo75.
172.-18.

oo-571.-236.

oo

-250.

oo

345.
393. oo51.
197.-278.

oo178.-131.

oo

81.-49.

oo241.-6.

oo232. oo246.
162.-144.

oo147.-309.

oo193.-54.

oo

54.-235.

oo

-53.

oo

117.

-104. oo225.
184. oo
183.
80. oo32.

402. oo169.
127.-269.

oo489. oo
42.
4.

oo

73.
415.-614.

oo246.-258.

oo-516.-114.

oo-420.-556.

oo536. oo94.

329. oo
631.
1429.-314.

oo-436.-1135.

oo-1043.-545.

oo-259.-358.

oo(including securites-257. 0investment of49

the long-terrn

3297. 0

HIDEKI IZAWA

50

Unit :
Datemillion-3811.0
dollar
78.11
78.12
79.01
79.02
79.03
79.04
79.05
79.06
79.07
79.08
79.09
79.10
79.11
79.12
80.01
80.02
80.03
80.04
80.05
80.06
80.07
80.08
80.09
80.10
80.11
80.12
81.01
81.02
81.03
81.04
81.05
81.06
81.07
81.08
81.09
81.10
81.11
81.12
82.01
82.02
82.03
82.04
82.05
82.06
82.07
82.08
82.09
82.10
82.11
82.12
83.01
83.02
83.03
83.04
83.05
83.06
83.07
83.08
83.09

20.0-427.0

733.0-772.0-1259.0-1475.0

215.0-185.0

543.0
1494.0-544.0-968.0

1014.0146.0
1868.01640.0-321.0-2199.0

1686.01945.01184.01938.0813.0-92.0

2614.0189.02773.01586.02788.0-2101.0

16.0-1008.0-649.0819.0
175.0-1901.0

3097.0-255.0-891.0-1685.0

127.0-3100.0

1164.0-1961.0

147.0
344.0
-969.0-497.0

3297.0281.0-377.0-225.0-170.0-1229.0

282.0-78LO-1133.0-1235.0-1245.0-1846.0

83.10
83.11
83.12
84.01
84.02
84.03
84.04
84.05
84.06
84.07
84.08
84.09

1149.0'-706.0-494.0-1864.0-1910.0-3515.0-2702.0-3230.0-3811.0-3403.0-1611.0-257.03297.0Table 2. The estimated results of the short-term capital fiows
method of estimation-Ordinary Least Squares or Cochrane-Orcutte
the dependent variable-ASCno.

period

1

1'

May

cons,

(i-i')

2'

O.26(O.98)

o;.yOe-- if62i6sxio3(1.24)

155.90(O.34)

113.99(1.19)

O.24

ott2xig.7Å~lo3(O.90)

1984

3

4'

-665.67(-1.24)
December
1980

5
5'

-443.80(-O.61)(L29)

271.47(L49)

O.26(O.98)

176,81(1,07)(1.22)

O.82(O.33)(1.45)

correlation coefficient of error

Ot:.l:1!--Ilg.s7Å~1o3-o-OLOl-- frE417oxlo3
O•rt>ti9!--ir'6.63Å~io3-Ot"5.74Å~lo3

591.33

1.06

ovlg-il'g61s7Å~lo3(2.45)(L96)

506.77

O.99(2.03)(1.79)

162.50(O.67)

61.20(O.20)(O.81)

Note : R2=determination coefficient

O.36(3.04)

1.02(1.72)

216.57

9

O:.tllt-il'g41s6Å~lo3

O.74(1.73)

s1984,M-o•oo>;5>ifGl67Å~1o3(1.31)

464.59-285.28(-O.29)

O.30

46.60

6

8

O.33

(O.57)

-9.52

1984

1977,ll

99.29(-O.09)sSeptember

7

R21S,E

ASCt-1

89.98

sSeptember

4

AR

99.68
(O.29)

1979
2

A(i-i')

adjusted by degree of freedom,term, t-values in parentheses.

O.37(2.84)

Ottyy9til'6.61Å~lo3

O.21(O.77)-OL::Otltglil343Å~lo3

O.24(O.92)-O-7t.ys5LtsrA.4gÅ~1o3

O.18(O.80)

O.62(3.41)

S. E, =standard error of the regression,

O-Ttss4!tlir5.gsxlo3'D.W.1P
1.35&

2:2::-6:'51o33

ii:

1.28

eg
Ee
:s

2t;:4>6rg.3g

2.22
1.39

S2

2.tne8.32

:i'
1.11

g?
E:
.o
>Z
EP

2tpt5.4s
2.17
O.84
O.79
2.14

D. W.=Durbin-Watson ratio,

P == serialx

HIDEKI IZAWA

52

same amount. The speed of adjustment in stock-adjustment equations are about O.3 inmonthly data and about O.6 in quarterly data. Kouri and Porter (1974) presented
results of the offsetting coefficients under the fixed exchange rate system. Their
hypothesis is that a change in the base money used as an exogenous policy instrumentby the monetary authorities may be offset by induced capital movements. If thecoefficient of change in the domestic base money component is equal to unity, thecomponent is perfectly offset by capital flows ; if it is equal to zero, there is nooffsetting at all, this means that offsetting of the capital movements on money supply
is completely sterilized by the authorities, An offsetting coefficient close to unity also

implies a high degree of integration between domestic and foreign capital markets andthe monetary authorities are powerless to sterilize the offsetting of international

capital movements on domestic money supply. According to Kouri and Porter's
results using quarterly data, the offsetting coefficient for Germany is about O.7, O.6 for

the Netherlands, O.5 for Australia, and O.4 for Italy. It appears that German monetary

policy was not so effective during the 1960's, as it was largely offset by induced

capital movements. This result indicates that while monetary policy had a strong
effect on the capital account in all the four countries, there was some room forindependent monetary policy.

4. Concluding Remarks
Let us conclude this paper by summarizing some main findings and problems to besolved.

Generally speaking, by Table 2 , we support the conclusion of the TsiangSohmen theoretical model. Although the explanatory power of the regressions is very
low, we get the results that the interest rate differential is not statistically significant

but both the change in interest rate differential and the change in reserves are
statistically significant in the estimation period from Dec, 1980 to Sep. 1984. Mutoh

and Hamada (1984) also present a similar empirical result using slightly different

variables in the estimation period from Mar. 1973 to Dec. 1980, The offsetting
coefficient is about unity, This implies that short-term capital movements is caused,
to large extent, by the intervention.

It must be admitted that there still remains the most difficult problems to besolved empirically. We need more appropriate independent variables to improve theexplanatory power, the adequate proxy for speculation or risk, and a satisfactory

hypothesis cocerning expectation formation of a future spot exchange rate.

AN EMPIRICAL STUDY ON INTERNATIONAL 53

SHORT-TERM CAPITAL MOVEMENTS IN JAPAN
References[ 1 ] Amano,A., lnternational Capital Movements : Theory and Estimation, MonographNo.2, The School of Business Administration, Kobe University, (1973).

[2] , "Short Term Capital Movements", in Amano, A. and F. Watanabe,' eds., Kokusai Kei2zziron (in Japanese), Yuhikaku, (1981), Ch, 8, pp. 265-299.

[3] Branson, W.H., "Monetary Policy and the New View of International Capital
Movements", Brooking Pmpers on Economic Activt'ty, no. 2, (1970), pp. 235-262,[ 4 ] Driskill, R. and S. McCafferty, "Spot and Forward Rates in a Stochastic Modelof the Foreign Exchange Market", Journal of International Economics, vol, 12,

no. 3/4, (May, 1982), pp. 313-331.
[ 5 ] Grubel, H.G., "The Theory of International Capital Movements", in Black, J. and

J.H. Dunning, eds., International Capital Movements, Macmillan, (1982),

Ch. 1, pp. 1-21. .

[ 6 ] Hodjera, Z., "International Short-Term Capital Movements : A Survey of Theory

and Empirical Analysis", IMF Staff Papers, vol. 20, no. 3, (November, 1973),

pp. 683-740.

[7]Kagami, N., "Floating Exchange Rates and Capital Movements-Japan'sExperience", in Fournier, H. and J.E. Wadsworth, Floating Exchange Rates- The
Lesson•s of Recent EtxPerience, SUERF, (1976), Ch. 5, pp, 71-94,[ 8 ] Komiya, R. and M. Suda, "Short Term Capital Movements under the Managed
Float", (in Japanese), Kat'zaigaku-Ronshu, University of Tokyo, vol. 46, no. 1,(April, 1980), pp. 11-57.

[9] , Modern International Finance (in Japanese), Nippon-KeizaiShinbunsha, (1983).
[10] Kouri, P. J. K. and M. G, Porter, "International Capital Flows and Portfolio

Equilibrium", Journal of Political Econompt, vol. 82, no. 3. (May/June, 1974),

pp. 443-467.
[11] Llewellyn, D. T., International Financial Integration-The Limits of Sovereignty,

Macmillan, (1980), Ch. 6.

[12] Mutoh, T., "Foreign Exchange Speculation and Market Efficiency under
Rational Expectations-Some Empirical Tests for Japan", Kel2ai- Kenk)tu, vol. 36,

no.1, (January, 1985), pp. 44-52.

[13] and K. Hamada, "International Short Term Capital Flow and The
Foreign Exchange Rate : Japan 1973-1980", The Economic Studies Quarterly, vol.

35, no. 2, (August, 1984), pp. 97-115,[14] Otani, K., "A Macroeconomic Model with the Forward Exchange Market", The
Economic Stzidies Ouarterly, vol. 33, no. 2, (August, 1982), pp. 97-110.
[15] Sohmen, E., Fle rct'ble Exchage Rates, revised ed., The University of Chicago Press,

54

HIDEKI IZAWA(1969).
[16] Tsiang, S, C., "The Theory of Forward Exchange and Effects of Government
Intervention on the Forward Exchange Market", IA4F Staff Papers, vol. 7, no. 1.,(April, 1959), pp. 75-106.

KOBE ECONOMIC & BUSINESS REVIEWCONTENTS
NO. 23 (1977)
Alternative Approaches to the
Accounting forEducation '''"'''''''••••••'''''''''''''''•-••••••••'''''''''••ny••••• Nobuko Nosse

Personnel Management of Japanese Companies
in Thailand: A Field Paper ''''''''''''•••••''''''''''''''-'•••••••••'''''''''•••• Hitleki Yoshihara

Evaluation of Performance Using
Mu1tiple Criteria '''''''''''''''"''''''''''''•''''''''''''''''-''••••••''''''''''••••• Koma)tuki Itow

Some Bargaining Process Models in
the Shipping Exchange ''''''''''''''''''''''''''-'''''''''''''''''-'''''''''''''''' Tetsupt ShimoJ-oAsset Diversification under the Flexible
Exchange Rate System ''''''''''''''''-'''''''''''-'''''''''''''''''''''''''''''''' Kazuhiro Igazva

NO. 24 (1978)
The Demand for International
Currencies and Reserves '''''"'''''''--'•••''''''''''''''''''''''''''''''--''''''' Masahiro Fafita

Nobtto Miyata
Studies for the Prediction of Shipping Markets-A Survey and their Applications- '''••'''''''''''''''••••••••••'''''''"'''••• Tetsufc' Shimojo

A Note on the International Transmission of
Policy Effects under Flexible Exchange Rates ''''''''''''-••'''''''''''''' Kazuhiro Igatva

A Control Estimation Approach toTime-varyingParameterModels ''''''''''''''''-'''''''''''''''''''''''''''''''''' Yufeio Uchido

NO. 25 (1979)
Redundancy of Seafarers and the Practiceof Permanent Employment ''''''''"''''•'•'''''''''''''-''''''''''''''''-'' Hiromasa Yamamoto

Japanese Multinational Enterprises:
AView from Outside ''-'''''''''''''"'''''ny'''''''''''''''''''-''''''''''''''''''' Hideki Yoshihara

AComment on the Bayaraa's Algorithm ''''''''''''''''''''''''''''''"''''''''''''''' Koma)tuki Itow

Effects of Ship's Size and Cargo Lotson the Ocean Freight Rates ''''"'''''"'''''''''''''''''''''''''''"''''''''-'''''' Tetsuk' Shimojo

Direct Foreign Investments and Foreign Exchange Rate:
A Model of Specific Factors and Non-tradable Goods ''''''"''''-''''''''' Ka2uhiro Igawa

NO. 26 (1980)
Economic Policies under the Flexible Exchange
Rate System: a Stock Approach and a Long-run
Government Budget Constraint ''''''''''''''''''''''''''''''''-''`'''''''''''''' Kaxuhiro Igazva

Estructura de las ventajas comparativasy
politica comercial-El caso de las exportaciones deproductos industriales en el Brasil '''''''''"'''''''''-''''''''''''''''''''''-''' Shok' Niship'ma

Technological Progress and Capital Accumulation ''''t-"""'"`'"'''"''' Kazuo Shimomura

NO, 27 (1981)
Accounting Systems ofNon-Market Oriented Activities '''''''''''''''-''''''''''' Nobuko Nosse

Current Situations of World Economy andGlobal Adjustment of lndustries ''"'''''"''''''''''''''''''''''''''''''''''''''''' Hikofi Katane

Current Cost Accounting and the Conceptof Specific Purchasing Power Capital "--"''''''''''''''''"""'""'"'''"''''' Isao Nafeano

An Input-Output Table for Evaluation of the
ShippingActivities '-'''''''''''''''"''''''''''''''''''''''''''''''''''''''''''''''' TetsupaShimoJ'o

The Function of Modern Corporate Financial Reportingin aMass Democratic Society ''''''''''"''''''''''''''''''''''''''''''''''''''' Hidetoshi Yamafi

NO. 28 (1982)
The Internationalization of Japanese Commercial Banking-Experiences in the 70's- '''''''''''''''''''''''''''''''''''''''''''''''''''''''' Masahiro Fufcta

Kenichi Ishigaki
ASynthesisofSimultaneousEquationsEstimators '''''''''''''''''''''••'••' HiroshiSadamichi
ADatabase System of Economic Time Series ''''''''''''''''''''''''''••••''''' Hiroshiimmichi

Yasuo Nunokami

NO. 29 (1983)
An Interpretation of Conventional Accounting
Income Information '''''"''''"''''''''''''''''''''''''''''''-'''''''''''''''''''''''''' Isao Alakano

A Production System for Transport Services ''''''''''''''''''''''''''''''''''''''' Tetsub' Shimojo

Some Evidences between Foreign Direct Investments
and Foreign Exchange Rates:
APre1iminary Note '''''''''-''-''''-'''''''''''''''''''''''''''''''''--''''''''' Kazuhiro lgaxva

Two Types of Railroad Regulation by Statesin the 19th Century of the U.S,
-Search for the Social Foundation of Modern
Corporate Financial Reporting- ''''''''''''''''''''-'''''''''''''''''''''''''' Hicletoshi Yamafi

NO. 30 (1984)
National Monetary Policy in an International
Capital Market --•''''''-''''-''-'-''''"'''''''''''''''''''''''''''''''''''''''''''''''' JtirgNiehans

Craft Unions, Wages and Employment ''''''''''''''''''''''''''''''''''''''''•••••• Murray C Kemp

On the Applicability and Implementability ofthe (Finite) Compensation Principle '"'"'''''''''''''''''''''''''''''''''''' Murray C, Kemp

Internationalization of Japanese Commercial Banking-The Recent Experience of City Banks- ''''''''''''''''''''''''''''''''''''' Masahiro Fufo'ta

Ka2uya Mizushima
Ryoichi Mikitani
Efficiency of the Least Squares Estimators in

Linear Models with Idempotent CovarianceMatrix of the Error TeTms ''-'''''''''''"''''''''''''''''''''''''''''''---'''''' HiroshiSddomichi

Diversification of Large Japanese
Manufacturing Firms '"''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' Hideki Yoshihara

Indexing Policies and Macroeconomic Stability in
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A Simple General Equilibriurn Model Involving
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KOBE UNIVERSITY ECONOMIC REVIEW 30, 1984
Edited by Faculty of Economics,
Kobe University, Kobe, JapanCONTENTS
A Critique of Rational Expectations Theory• ''''•'''''''''"'''''''''''''''''''''''' James S. Duesenberi y

The Decision of New Investment, Technique and Rate of Utilization ''''''''''''''''' Nobuo Okishio

Transportation of Goods on the Inland Sea ofJapan in the Middle of the Fifteenth Century '••••••••••••••••••••••••••ny••••''••••ny ny•• Tetsuo Kamiki
Investrnent, Rep1acement and Depreciation Funds ' ' ' ' ' " ' ' ' ' ' ' ' • • • • • • • • • • • • • • • • • • • • • • • • • Hidayuki Adachi

Technical Change and the Rate of Profit : Considering fixed capital ''''''''''''•• Takeshi Nakatani

On the Substitutability of Public Stocks for Private Stocks under
Rational Expectations ''''''''''''''''''''''''''''''''"'''''''''''''''''''''''''''''••••••••• Ka2uo Ogazva

i-1mo,ntorpt")le.stewtsM-NntMMH,,i"d"MlltlNi,-,iddllou1palt"ptptMNmp-slew1ke-,"-M"ke-ntNltP"-HemuN--i-aj-ewin.-nvM-bew-1ew1ta;-,dnew1taH-ewbi.whpmke"

THE ANNALS OF THE SCHOOL OF BUSINESS ADMINISTRATIONKOBE UNIVERSITY No. 29, 1985
Edited by the School of Business Administration,
Kobe University, Kobe, JapanCONTENTS
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Preissteigerungen bzw. Preisminderungen-die Konzeption der
synchrqnen Erfolgsrechnung '''-''''''''''''''''''''''''''''''-'''''''''''''''''''''''''''''' Helmut Koch

Ergonomische Aspekte der Storungsidentifikation bei
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Produktionscontrolling auf der Basis von Betriebsmodellen "''''''''''''''''''''''''' Gert LaBmann

New Technologies and their Effects on Employrnent and Social
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Edited by Faculty of Law
Kobe University, Kobe, JapanCONTENTSThe Role of Law in Japan : An Historical Perspective '''''''''''''''''''''''''''''''' John Ozven Halay
Der Wi11e im Rechtsgeschaft '''''''''"'''''`'''''''''"'''''''''''''''''''''''''''''''''''''''''''' Kiktto IshidZi

The Business Groups and the Distribution System, and the
Antimonopoly Law in Japan (1) ''''''''''''''''"''''''''''''''''''''"''''-''''''''''''''''Akira Negi'shi,Hd

RESEARCH INSTITUTE FORECONOMICS AND
KOBE UNIVERSITY
BUSINESS ADMINISTRATION,

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HISTORICAL SKETCH
In 1919, a research organization named the Institute for Commerce was founded in
Kobe Higher Commercial School, one of the chief predecessors of Kobe University,with a gift made by F, Kanematsu & Company, a leading mercantile firm in Kobe, The
organization was designed to carry on and facilitate integrated research on businessand commerce and to formulate and pubiish the results of these studies andinvestigations in such form as to make them available to the business community,

With the founding of Kobe University of Commerce, successor of Kobe Higher
Commercial School, in 1929, the Institute extended its research activities by adding

several divisions, One was the famous Latin-American Library, which soon became
the center of research in this field in Japan, A room for statistics equipped withvarious computing machines was established and began publication of Jayo Kelzai
Tokel and Sekai Boeki Tokei annually, A filing room was prepared to deposit press-dclipping files systematically arranged by topics and dates, Another room wasdesigned to become the center of all possible original records and data having to dowith the beginning and progress of Japanese business.
On the campus of Kobe University of Commerce, another organization named theInstitute for Business Mechanization was founded in 1941 utilizing businessmachines donated by the IBM Corporation and others. With Professor Yasutaro Hirai
as its head a broad and forward-looking plan for business mechanization in Japan wasdeveloped.

In 1944, Kobe University of Commerce changed its name to Kobe University of
Economics. After the War, however, the University was consolidated with three othercolleges in Hyogo Prefecture to become Kobe University. With this development, thetwo Institutes were also amalgamated into the Research Institute for Economics andBusiness Administration, Kobe University. At present, the Institute, with its nineteen

full-time professional staff members, carries on studies and investigations ininternational economics, international environment, comparative economics,
international business and management information systems.

ORGANIZATIONThe Institute consists of five sections. Each section and its research subjects are as
follows:

1. International Economic Studies

International Economics, International Monetary Economics,
Maritime Economics, International Labor Relations
2. International Enyironmenta1 Studies

Resource Development, International Organizations,International Industrial Adjustment

3. Comparative Economic Studies
Pacific Basin I (Oceanian Econorny),

Pacific Basin ll (North and South American Economics)
4. International Business Studies

Comparative Business, Multinational Enterprise,International Business Finance

5. Management Information Systems
Business and Accounting Information, Information Processing System,
International Comparative Statistics
In addition to the ordinary work of each section, several research committees,
whose members are not Iimited to the Institute staffs, are regularily held to carry on

joint studies.At present, there are nine standing research committees, as follows:

Experts Group on the World Trade Structure, Committee of International Finance,

Committee of Maritime Economics, Committee of Labor Market, Committee ofInternational Studies on Economic and Industrial Structure, Committee ofInternational Comparative Economics, Committee of International Business
Behavior, Committee of Management and Accounting Information Systems, andCommittee of lnternational Comparative Statistics.
For convenience and greater efficiency in carrying out its research activities, theInstitute has a general office which is responsible for 1) the collection andpreservation of a comprehensive collection of books, periodicals, pamphlets, andoriginal records and data of finance, trade, commerce, industry and businessgenerally; 2) the classification, cataloguing, indexing arranging, annotation andcompilation of these reseach materials; and 3) the formulation and publication of theresults of the investigations and studies accomplished by the professional staff
members of the Institute.
As an affiliated institute, the Documentation Center for Business Analysis has
been established in 1964. It is the first systematic information facilities in the field of

business administration in Japan that has been recognized and authorized by the
Ministry of Education, The purpose is to collect and to make intensive control of all
kinds of materials on business administration and to make them available to scholars,

universities, governments, and business world with the aid of modern documentation
techniques,

ilii ECONOMICS&BUSINESSRESEARCH
INSTITUTE

1l

ADMINISTRATIONUNIVERSITYii Director: Hikoji

i Secretary:

KATANoi
1Yasuhirolli INTERNATIONAL ECONOMIC STUDIESl International Economics

Prof. Hikoji KATANo i

Assoc. Prof. Kazuhiro lGAwA ili International Monetary Economicsl Maritime Economics:: International Labor RelationsProÅí Masahiro FuJITA li

Prof. Tetsuji SHiMoJo lProf, Hiromasa YAMAMoTo i

Assoc. Prof. Kazuo SmMoMuRA i:i

T INTERNATIONAL ENVIRONMENTAL STUDIESi Resource Development
i International Organizationsil International lndustrial Adjustmentli1Prof. Tetsuji SHIMoJo iProf, Masahiro FuJiTA i

Assistant Hideki lzAwA i
Prof. Hiroshi SADAMICHI l

Prof. Akira NEGIsHIiii COMPARATIVE ECONOMIC STUDIESl: Pacific Basin I
i (Oceanian Economy)i Pacific Basin lli (North and South American Economies)lProÅí Yoshiaki NIsHIMuKAI i'

Assoc. Prof. Kenichi lsHIGAKI i

Prof. Yoshiaki NIsHIMuKAI !

Assoc. Prof, Shoji :NIsHIJIMA ili INTERNATIONAL BUSINESS STUDIES:i Comparative BusinessProf. Tadakatsu
lNouE i
Assoc. Prof. Kenji: KoJiMA i•:!

i Multinational Enterprisei International Business Finance;il;Prof. Hideki YosHIHARA i:
Assoc. Prof, Hidetoshi YAMAJi liProf. Isao NAKANo i

Prof, Akio :MoRi ii MANAGEMENTINFORMATIONSYSTEMSi Business and Accounting lnformationl Information Processing Systemi International Comparative Statisticsi;Prof. Isao NAKANoiProf. Nobuko NossE i
Prof, Nobuko NossE i:
Assoc. Prof. Komayuki
lTow :

Assoc. Prof. Yasuo KoNisHi iii'i: KOBE UNIVERSITYHall i: Office: The Kanematsu Memorial:

I

ROKKO, KOBE, JAPANiilIl