Why Has Japan's TFP Growth Recovered?: An empirical analysis based on the basic survey of Japanese business structure and activities

According to growth accounting analysis based on the JIP Database 2008, the growth of Japan's total factor productivity (TFP) has accelerated in the first decade of this century, centered on nonmanufacturing industry, and TFP in manufacturing industry has also recovered since 2001. In addition, the growth in TFP in nonmanufacturing industry has occurred amid a decline in labor, capital services, and intermediate inputs. In this paper we use micro data in the Basic Survey of Japanese Business Structure and Activities from 1994 to 2005 to find out what kind of mechanism has given rise to this acceleration of Japan's TFP growth, and what kinds of firms have succeeded in enhancing their productivity. We first analyze the productivity dynamics after decomposing the rate of TFP growth into internal, redistribution, and entry-exit effects, finding that in both manufacturing and nonmanufacturing industry the acceleration of TFP growth in the 21st century is an internal effect (acceleration of TFP growth within firms). A modest improvement in the metabolic function is observed, but the exit effect has been negative in many industries during the 2000s. Next, we use data confined to only continuing firms to analyze why the internal effect has been rising, finding that much of the acceleration of TFP growth in the Japanese economy has been achieved by corporate restructuring. In other words, despite falls in labor, capital service, and intermediate inputs, production volume has been maintained or has declined only slightly. We find also that this restructuring is being conducted primarily by firms facing global competitive pressure, such as exporters, multinational firms, and firms oriented towards R&D. In the case of the upper 25% of firms in each industry with high debt-equity ratios, we find that initial TFP levels are markedly low relative to those of other firms, but are raised by substantially reducing inputs of all factors of production, even when economic conditions are healthy. Also, it is possible that the approach to resolving the problem of zombie firms in Japan lies not in exiting but in restructuring.