Silviase/jgov_v1.4_full_ann huggingface dataset:
Tanaka, Kitano (2002) and Nakazawa, Onishi and Harada (2002) (hereafter NOH) using VAR (Vector Autoregression) models, suggest that monetary shock might be an important factor to explain the fluctuation in the 1980s and 90s. These studies are very much different in which points they emphasize. Bayoumi stresses various factors such as fiscal policy, monetary policy over investment during the bubble and decline in the financial intermediation function. He thinks that major factor is disruption in financial intermediation, largely operating through the impact of changes in domestic asset prices on bank lending. Miyao, Tanaka and Kitano, and NOH stress the importance of monetary policy. NOH argues that the decline in the financial intermediation function is also caused by a deflationary monetary policy, which resulted in asset price decline.

Of course, correlation does not necessarily mean causation. Monetary fluctuation might be a result of real economic fluctuation, but, at least in the middle of the 1980s, monetary policy was intently expansionary. At the end of the 1980s to early 1990s, the policy was also intentionally shrinking in order to burst the bubble.

Effects of Monetary Policy: Temporal or Persistent?

It might be agreed to some extent among Japanese economists (Kosai, Ito, Arioka (2000) and Miyao (2002), for example) that monetary policy caused the fluctuations at the end of the 1980s and early 1990s. This fluctuation is explained by the widely accepted theory of unexpected money (Barro (1977)). Studies on the Japanese economy using data before the early 1990s, such as that from Horiuchi (1991) and McCallum (1993), usually show that the effects of unexpected money are weak in Japan. On the contrary, NOH (2002) shows that unexpected money significantly explains real GDP fluctuations. Additionally, Miyao (2002) shows that call rate fluctuation persistently affects real production during the bubble and bubble burst.
periods. The difference between Horiuchi, McCallum and NOH can be explained by the fact that Horiuchi and McCallum do not necessarily include data of unexpected money because the money supply was very stable before the end of the 1980s, while NOH uses very unstable money data at the end of the 1980s to early 1990s $ ^{5} $ .

I can thus conclude that unstable monetary policy explains Japanese economic fluctuations from the end of 1980s to early 1990s, but I cannot yet explain the persistent economic stagnation after the middle of the 1990s.

### 3. Factors Providing Monetary Policy with Persistent Impacts

To fully explain Japan’s Great Recession, it is necessary to explain why monetary policy affects persistent impacts. To do that, I will propose two factors: wage rigidity and debt deflation caused by the past nominal debt contracts, which provide monetary policy with persistent power.

## Wage Rigidity

Chart 6 shows real hourly wage, production, unemployment rate, and consumer price index in Japan and the United States. Because there is no official hourly wage data in Japan, we calculated hourly wages by dividing contractual earnings (including
overtime pay) by contractual labor hours (including overtime hours) $ ^{6} $ . Real wages in Japan increased even in the 1990s, and decreased after 1998. On the contrary, U.S. real wages decreased even until 1996, and started to increase in 1997, while U.S. economy was in good shape. It is natural that Japan's unemployment rate increased and U.S. unemployment rate decreased in the 1990s, because Japanese real wages increased in recession and U.S. real wages decreased in prosperity. As the result, employment in the United States increased sharply, consumption increased rapidly, profits soared, and investment expanded drastically. But in Japan in the 1990s, the opposite occurred. Japan's labor share increased from about 67 percent in 1975-1990 to about 72 percent in 1990s, and exceeded that in U.S. In Japan profits were squeezed, investment shrunk, total demand declined, and employment decreased. This is a vicious circle.

## Phillip's Curve

The same story can be explained by the Phillip’s Curve. Figure 7 shows Japan’s Phillips Curve in 1980-92 and 1993-2002. The Phillip’s Curve in 1980-92 has steep slope, and the curve might be vertical, but the slope in 1992-2002 is soft and might be horizontal. The shape of the curve suggests that deflation in 1990 contradicts the wage rigidity and increased the unemployment rate sharply.

The Phillip’s Curve also shows that there was not structural shift in the labor market. If there was, the curve must not be a stable right-declining slope, and we see a right-increasing slope, as we saw in the 1970s. Japan’s Phillips Curve in the 1990s is consistent with the argument of Akerlof, Dickens, Perry (1996), who wrote that deflation persistently increases unemployment under the downward rigidity of
wages.

## Nominal Debt Contracts

Concerning the nominal debt contract, I cannot express the impact drastically in charts, but the variable is also important considering that the decline in wages after 1998 did not produce a recovery. It seems that problems of nonperforming loans became severe after 1998, when deflation became serious.

### 4. VAR Model

This collective evidence in Section 3 is casual, but strong. We will now construct a VAR (Vector Autoregression) model that considers the factors that provide monetary policy with prolonged impacts on the economy. We added the difference between a real-wage rate and marginal productivity of labor, and non-performing loans to the usual VAR model developed by NOH (2002). NOH uses gross capital formation by the government as a fiscal variable, call rate, money supply (M2+CD), and exchange rate as monetary variables, and GDP deflator, real exports in SNA data, real GDP, consumption tax dummies, and seasonal dummies.

For the difference between real wage and marginal productivity of labor, we estimated marginal productivity of labor (See appendix on the method of estimation). And we use excess debt $ ^{7} $ , defined as debt minus cash flow times five years (20 quarters) calculated in Onishi, Nakazawa, Harada (2002) as proxy variable for non-performing loans.
These variables are compiled by us, not widely used, and not officially published. Then we will show these variables - the difference between real wage and marginal productivity of labor, and excess debt in Chart 8. Real wage rate, marginal productivity of labor, and the difference are expressed in logarithm. Excess debt is stood for trillion yen. Real wage was larger than marginal productivity of labor in the latter half of 1980s, but was smaller in 1990s. That is, real wage was too high throughout 1990s. Excess debt jumped in early 1990s, and gradually declined in 1990s.

Procedures for constructing the VAR model

GDP data has been revised since 1980, and we use 1980 to 2002 as the estimation period. All the data are quarterly data. The logarithms of all data have been taken, with the exception of the call rate. For excess debt, the value is minus in 1980, we used the data after 1981. The results of unit root tests using augmented Dickey-Fuller test are given in Table 9. The table shows that all the variables are generally denied unit roots by taking the first differences of the variables. We then use these first differences of the variables.

The data used here are gross nominal capital formation by the government $ ^{8} $ , the call rate, money supply (M2+CD), exchange rate, GDP deflator, real wage minus marginal productivity of labor, real exports, excess debt, real GDP, seasonal dummies, and consumption tax dummies. The definition and the source of the data are summarized in Table 10.

We then estimate the VAR model using all the data. To select rag order, for first
to sixth orders, Schwarz Criteria and AIC (Akaike Information Criteria) are calculated. For Schwarz Criteria, first order was selected, and for AIC sixth order was selected. Here we chose first order lag.

## Granger Causalities

The results of Granger causalities are as shown in Chart 11. Monetary variables (call rate or money supply) cause GDP deflator. GDP deflator causes real GDP, real export and nominal public investment. Real export causes real GDP, GDP deflator and public investment. Excess debt causes GDP. GDP causes export, GDP deflator and Public investment, but public investment does not cause GDP. Public investment causes export and GDP deflator. We don’t know why GDP, GDP deflator and export cause public investment. It might be explained by the fact that stagnant GDP growth, deflation and decline of export become a pressure to expand public spending.

## I mpulse response functions

The analysis here depends on Cholesky decomposition, assuming that the interdependence of the variables is recursive. In this case, the result of the impulse response function is changeable according to the order of explanatory variables. In principle, variables are arranged in the order of policy variables, market variables, and economic variables. Concretely, the order of the variables are gross nominal capital formation by the government, the call rate, money supply (M2+CD), exchange rate, deflation deflator, inflation deflator, real wage over productivity, real exports, excess debt, real GDP. The order of monetary variables and deflators are basically consistent to the results of Granger causality.

The results are shown in Chart 12. Dotted line means 5% level of significance.
The impacts of various variables to real GDP are as follows. Public investment significantly increases real GDP. The increase of the call rate reduces real GDP, but the effect is statistically insignificant. Money supply significantly increases real GDP. Exchange rate depreciation (exchange rate is expressed as yen per dollar) increases real GDP, but the effect is statistically insignificant. GDP deflator significantly increases real GDP. The increase of real wage compared to marginal productivity of labor significantly reduces real GDP. Real export also significantly increases real GDP. The impact of excess debt is not significant.

We estimated the VAR model in the opposite order of the variables. The significance of public expenditure, money supply, and exchange rate became weak, but the essential nature of the result doesn’t change.

Chart 12 shows the response to one standard error shock of various variables, but to reach any policy implications, the response to one percent shock is convenient. Table 13 shows the accumulated response of 10 quarters (2.5 years) of one percent shock. The table shows what variables are numerically important. A one percent increase of public investment increases real GDP by 0.14 percent over two and a half years. This figure is translated into a Keynesian multiplier by dividing the ratio of nominal public investment to nominal GDP (about 8 percent). The figure is about 1.7, and slightly larger than the multiplier compiled by complicated macro econometric model such as Hori et al. (2003). A one percent increase of the call rate reduces real GDP by 0.45 percent. A one percent increase of money supply increases real GDP by 1.37 percent. This is a very large number, but similar research basically produces same number. NOH (2002) estimate the number 1.64 for two years. A one percent depreciation of the yen increases real GDP by 0.05 percent. A one percent increase of GDP deflator increase real GDP by 0.05 percent. A one percent increase of real wage
compare to marginal productivity of labor reduces real GDP by 0.28 percent. Real wage minus marginal productivity of labor increased 10 percent since the bubble period to the middle of the 1990s (See Chart 8(1)). It is possible to say that this factor caused three percent decline of real GDP in the middle of 1990. A one percent increase of real export increases real GDP by 0.28 percent. This number seems too large, considering that the weight of export to GDP is about 10%. Excess debt does not affect real GDP. This seems to be an unexpected result for many people, so we put excess debt in the first order of the variables in Cholesky decomposition. The result of the accumulated response of 10 quarters (2.5 years) of one percent shock is shown in Table 14. But still excess debt does not affect real GDP, either.

## Points of Estimation Results

The results basically support the conjectures in Section 2 and 3 of this paper. Monetary policy variables such as money supply, call rate, and exchange rate are important in explaining the Great Recession, and wage rigidity is also significant. Excess-debt variable used here is not important. This does not mean that non-performing loan is not important. The variable as bad loans used here are not exact. No one knows the true value of the bad loans. If I can find more accurate and theoretically persuasive variables for bad loans, then I might be able to find the result that deflation itself and the bad loan are much more important. Still, I need to explore the real impacts of excess debt. And we cannot explain how monetary variable effect real economic activity by adding real wage compared to marginal productivity of labor and excess debt. Monetary impact is very large, but we cannot understand why the impact is so large and persistent.

Instead of pursuing the reason why monetary impact is persistent, it might be
reasonable to think that successive monetary shocks affected real economy throughout 1990s and beyond. We can think of these shocks such as yen appreciation in 1995, inadequate monetary expansion for financial systemic risk in 1998, and break of monetary expansion in 2000. These successive monetary shocks might affect real economy persistently.

Monetary Policy Making in a Country Captured by Divided Vested Interests $ ^{9} $

Japan’s Great Recession was caused by strict monetary policy. A natural question thus arises: Why didn’t Japan increase the money supply? The reason is simple. Japanese banks held a great amount of government bonds. Table 15 shows the extent to which banks held them. The vertical line shows the ratio of government bonds to total assets of each bank in March 1998, and the horizontal line shows the ratio in March 2003. This figure shows that Japanese banks increased their government bond holdings from 1998 to 2003. In this situation, if the Bank of Japan increased the money supply, then nominal interest rates would increase through economic recovery and price expectation effect (Fisher effect), and bond prices would fall. Of course, the main assets of ordinary banks are loans, so the balance sheets of ordinary banks will be improved by economic recovery even though bond prices fall. But there might be unusual banks, and the Japanese monetary authority must be concerned about that. This might be a reason why the Japanese monetary authority cannot use the power of monetary policy.
### 5. Conclusions

Japan’s Great Recession is basically explained by monetary factors. The persistence of the monetary impacts is partly explained by wage rigidity. And we can also think that successive monetary shocks affected real economy throughout 1990s and beyond. The impact of excess debt in this estimation was not significant, but it is too early to conclude that the impact of the bad loan was small, because variable used here is just excess debt, not bad loan.

If the Bank of Japan increases the money supply, then some banks might be in a difficult situation. But, if deflation continues, much more banks will go in a more serious situation, and much more enterprises will also go bankrupt.

## Appendix

Estimating Procedure of Marginal Productivity of Labor

Marginal productivity of labor is calculated by using Cobb=Daggles Function. Capital and utilization index are estimated as follows.

1. Estimation of Capital Stock

1990 base data and 1995 base data of Private Capital Formation in SNA Data were connected. Capital stock of JT is subtracted from manufacturing capital stock. Capital stock of JT, NTT, Electric Power Development Co. Ltd. JR, Privatized Bullet Train is subtracted from capital stock in all the industries. Capital stock in non-manufacturing sector is capital stock in all the industry minus manufacturing sector.

2. Estimation of Utilization Rate in Non-Manufacturing Sector

Indices of Tertiary Industry Activity in 1990 base data and 1995 base data were connected in average of 1995. After taking seasonal adjusted method, we estimate the
following equation.

Log(Indices of Tertiary Industry Activity / Capital stock in non-manufacturing sector)

$$ =c+a\times TREND $$

And we put the error of the above equation in the following equation.

## $ (\text{Error} + 1) \times 100 $

We can make an indicator from the above equation by making the indicator 100 for year 2000.

### 3. Employment Earnings

Until 1989 data in 68SNA and after 1990 data in 1993SNA were used.

### 4. Seasonal Adjusted Data

All the data except capital stock is seasonal adjusted by X-11.

### 5. labor share

Labor share a = employment earnings/nominal GDP = 0.536882614

This is average of data since 1980 to 2002

### 6. Estimation

We estimated A and λ in the following equation.

$$ \ln(GDPs)=\ln(A)+0.536882614\times\ln(LEYEDs\times HPAs)+0.463117386\times\ln(km\times kadou+kn\times kadou\_{n} $$

$$ )+~\lambda\times TREND $$

### 7. Marginal Productivity of Labor

Marginal productivity of labor is calculated by differentiating the equation in 6.

$$ w^{*}=\alpha\times A\times e^{\lambda T}\times\left(\frac{km\times kadou+kn\times kadou\_{n}}{leyed\times hpa}\right)^{1-\alpha} $$

### 8. Real Wage

Employment Earnings

Until 1989 data in 68SNA and after 1990 data in 1993SNA were used.
The data is seasonal adjusted by X-11.

Wage Rate = Employment Earnings / (No. of Employee × Working Hours)

Real Wage = Wage Rate / GDP deflator.

## References

Akerlof, G., Dickens W T., and Perry G L., "The Macro Economics of Low Inflation," Brookings Papers on Economic Activity, No.1. 1996

Baily and Solow,"International Productivity Comparisons Built from the Firm Level," Journal of Economic Perspective, Vol15, No.3, summer 2001, pp151-172

Barro, Robert (1977), "Unanticipated Money Growth and Unemployment in the United States," American Economic Review 67:101-115 March 1977

Bayoumi, Tamin, "The Morning After: Explaining the Slowdown in Japanese Growth in the 1990s," Journal of International Economics, No.53, 2001. pp241-259, NBER Working Paper No.7350 September 1999

Haberler, Gottfried, Prosperity and Depression - A Theoretical Analysis of Cyclical Movements, 3 $ ^{rd} $ edition, George Allen and Urwin, Ltd., 1958

Hall, Thomas E and J. David Ferguson, The Great Depression: An International Disaster of Perverse Economic Policies, The University of Michigan Press, 1998

Harada, Yutaka, Nihon no Daiteitai ga Owaru Hi (The day when Japan’s Great Recession Ends), Nihon Hyouronsha, 2003

Harada, Yutaka and Akio Egawa, “Chingin no Kouchoku-sei to kinyuu Seisaku no Shoutotsu (Conflict between Wage Rigidity and Monetary Policy)” in Harada and Iwata (2002)

Harada, Yutaka and Iwata Kikuo ed. Defure Fukyou no Jisshou Bunseki (Empirical Analysis of Deflation-Depression), Toyoukeizai Shinpousha, 2002

Hayashi, Fumio (2002), “Kouzou Kaikaku nakushite Seichou nashi (No Growth without Structural Reform),” in Iwata and Miyagawa (2003)

Hori, Masahiro and Ito Yasuaki,"Zaisei Seisaku ka Kinyuu Seisaku ka: Makuro Jikeiretsu Bunseki ni yoru Sobyou (Fiscal Policy or Monetary Policy? A Sketch by Macro Time Series Analysis," in Harada and Iwata(2002)

Horiuchi, Akiyoshi (1991) Shouwa Zaiseishi Shouwa 27-48nendo Dai 9 Kan Kinyuu (1) (Fiscal History of Shouwa Era FY1952-1973 Vol.9 Monetary Policy (1)), Ministry of Finance ed., Toyou Keizai co. ltd.
Iwata, Kikuo and Tutomu Miyagawa ed. Ushinawareta 10 nen no Shin-in ha Nanika (What really caused the “Lost Decade”), Touyou Keizai Shinpousha, 2003

Kuttner, Ken and Adam Posen," The Great Recession: Lessons for Macroeconomic Policy from Japan", Brookings Papers on Economic Activity, No. 2, pp. 2001

Kosai, Yutaka, Osamu Ito, Ritsuko Arioka, "Baburu ki no Kinyuseisaku to Sono Hansei(Monetary Policy in Bubble Age and Its reflections), Kinyuu Kenkyuu, Institute of Monetary and Economic Studies, Bank of Japan, Vol19, No.4, December 2000

Mallon, Richard in collaboration with Juan Sourrouille, Economic Policy Making in a Conflict

Society: The Argentine Case, Harvard University Press 1975

McCallum, Benet T,"Formulation of Monetary Policy Rule and its Analysis --- An Application to Japan (Japanese)", Kinyuu Kenkyuu, Institute of Monetary and Economic Studies, Bank of Japan, Vol.12 No.4, December 1993

Miyagawa, Tsutomu, “‘Ushinawareta 10 nen’ to Sangyou Kouzou no Tenkan (‘The Lost Decade’ and Transformation of Industrial Structure,” in Iwata and Miyagawa (2003)

Miyao, Ryuzou,"The Effects of Monetary Policy in Japan," Journal of Money, Credit and Banking, Vol.34, No.2, May 2002

Motohashi, Kazuyuki (2001), “Nihon Keizai no Jouhouka to Seisannsei ni kansuru Beikoku tono Hikaku Bunseki (Information Orientation and Productivity of Japanese Economy: A Comparative Analysis with the U.S.,” RIETI Discussion Paper Series 02-J-018

Nakajima, Takanobu, Soukyu Kasuya, Tomomi Saida and Tomoki Tanemura (2001), “Sekutaa Betu Seisansei Henka no Bunseki to Kouzou Henka no Kenshou (Analysis of Productivity Change by Industrial Sector and Evidence of Structural Change), Working Paper Series, Bonk of Japan, January 2001

Nakazawa, Masahiko, Shigeki Onishi and Yutaka Harada (2002) "Zaisei Kinyuu Seisaku no Kouka (Effects of Fiscal and Monetary Policy)" Financial Review, Policy Research Institute, Ministry of Finance, No. 67, 2002

Tanaka, Hideaki and Kitano Yuuchirou,"Oubei Shokoku ni okeru Zaisei Seisaku no Makuro Keizaiteki Kouka (Macro Economic Effects of Fiscal Policies in Europe and the United States)", Financial Review, Policy Research Institute, Ministry of Finance, No. 63, 2002
Table 1 Magnitudes of Bubbles and Stagnations in Advanced Countries in 1980s

Period of Bubble	Magnitudes of Bubbles	Magnitudes of Stagnations
Japan	1987	-	1991	7.8
Australia	1984	-	1989	7.2
New Zealand	1983	-	1987	9.8
Austria	1988	-	1991	4.4
Belgium	1987	-	1990	4.1
Denmark	1982	-	1986	5.8
Finland	1987	-	1989	5.2
France	1986	-	1989	3.6
Italy	1984	-	1989	3.2
Sweden	1984	-	1989	4.9
Switzerland	1984	-	1990	9.9
Average	6.0	-6.8

(Source) Harada(2003) Chapter2, Table2-1, Orijinal data are from International Monetary Fund, International Financial Statistics

(Note)

1. 11 countries which experienced bubbles are selected from advanced 23 countries in IMF, IFS data according to the following procedures.

(1) Real GDP growth rate continuously exceeded trend growth rate (1970-2000 average) by 3 years in middle of 1980s to early 1990s, and real GDP growth rate continuously declined by the

trend growth rate for more than 3 years.

(2) Stock price increased by 100% in bubble age.

(3)Per capita GDP exceed 5000 $ in 1985.

2. Magnitude of Bubbles is accumulated difference of trend GDP.

3. Magnitude of stagnation is accumulated difference of trend GDP.
Chart 2 Real GDP and Real GDP per Working Hour

(Source) Cabinet Office"SNA," Ministry of Welfare and Labor"Monthly Labor Survey"

(Note) 1\. Real GDP per Working Hours= Real GDP/(Workers by Industry

×Working Hours by Industry)

2.63 SNA and Monthly Labor Survey are used before 1989. 93 SNA is used after 1990.
Table 3 Growth Accounting

1980-85	1985-90	1990-95	1995-00	Change
80-85 to 95-00
Output	3.25	5.14	1.69	1.45	-1.80
Labor	1.14	1.33	-0.04	-0.14	-1.28
Capital	1.50	2.30	1.16	0.85	-0.65
Information Capital	0.31	0.41	0.15	0.51
Other Capital	1.19	1.89	1.01	0.34
TFP	0.60	1.52	0.57	0.74	0.14

(Source) Motohashi, Kazuyuki, "Information and Productivity of Japanese Economy - A Comparative Study with U.S. (Japanese)" Research Institute of Economy, Trade and Industry RIETI Discussion Paper 02J018
Chart 4 Real GDP, Money Supply and Government Investment

(Source)Cabinet Office"SNA,"Bank of Japan"Financial and economic Statistics" (Note)GDP growth rate in 1980 is calculated by 68SNA.

Chart 5 Real GDP, Exchange Rate and Real Exports

(Source) Cabinet Office"SNA," Bank of Japan"Financial and Economic Statistics," (Note) GDP growth rate in 1980 is calculated by 68SNA.