A Half Century of Trans-Pacific Competition: Price level indices and productivity gaps for Japanese and U.S. industries, 1955-2012

Trans-Pacific competition between Japanese and U.S. industries has provided powerful incentives for mutually beneficial economic cooperation between Japan and the United States. The benefits would be greatly enhanced by the proposed Trans-Pacific Partnership, an international agreement that would involve Japan, the United States, and 10 additional countries of the Asia-Pacific region. In this paper, we analyze competition between Japanese and U.S. industries in detail over more than a half century. We conclude with a discussion of opportunities for improving productivity performance in both countries.

We first present new estimates of price level indices for Japan and the United States over the period 1955-2012. These indices are key indicators of international competitiveness between the two countries, often expressed as over-valuation or under-valuation of the Japanese yen relative to the U.S. dollar. We provide price level indices for outputs and inputs of 36 industries and for the two economies as a whole. The inputs at the industry level include capital, labor, energy, materials, and services (KLEMS). For an economy as a whole, output is gross domestic product (GDP) and the inputs are capital and labor services.

We use our price level indices to generate new estimates of productivity gaps for the two countries and for individual industries. The productivity gap is an indicator of the efficiency of production. A wide Japan-U.S. productivity gap that existed in 1955 contracted for more than three decades, and Japan came close to parity with the United States in 1991. After the collapse of the "bubble economy" in Japan, the Japan-U.S. productivity gap widened again and only a few industries in Japan retained a productivity advantage over their U.S. counterparts in 2012. We conclude that industries sheltered from international competition offer the greatest opportunities for improvements in productivity performance.