Major Common Themes: 2005

I. Comprehensive Appraisal of "Lost Decade"

RIETI seeks to comprehensively appraise gains and losses of the 10-year stagnation both from macro- and micro-economic viewpoints and to identify new challenges. Such systematic research on the exit mechanism from deflation will provide valuable knowledge to other developed nations as well as to neighboring Asian countries.

I-(1) Exit mechanism unique to Japan's deflation

1. The Connection Between the Dynamics of Public Debt, Prices, and Exchange Rates and the Real Economy

Leading Fellow(s)

Overview

The key macroeconomic issues in Japan today are the fragile financial system, continuing deflation, the expanding public debt, and trends in exchange rates. To contribute to the solution of these problems, this project will use a macro model that gives consideration to the financial system to analyze the connection between the dynamics of public debt, consumer prices, and exchange rates on the one hand and the real economy (the welfare of society) on the other.

In addition, research will be conducted on several topics derived from this theme (e.g., the problems of bank credit and business-to-business credit, coordination failure in corporate and government sectors, et cetera). Analysis will center on theoretical research but may also include (1) construction of a theoretical model, (2) empirical research using data, and (3) case studies of various countries.

Major Research Results

RIETI Discussion Papers

2. The Mechanism for Exit from Deflation in the Late 19th Century

Leading Fellow(s)

Overview

In identifying the mechanism for Japan's deflation from the 1990s and the exit from it, one important method is to study an episode of deflation in the past. There exists a view that it is necessary to shed light not only on the Great Depression of the 1930s but also on the deflation of the late 19th century. In comparison to the Great Depression that occurred at a time of great uncertainty between the two world wars, the deflation of the late 19th century -- which occurred amid moves toward globalization -- has more similarities to the situation today wherein China and India are emerging as full-fledged players in the global market. In the late 19th century, mild deflation continued over a period of 25 years under the gold standard regime, a substantially stable international monetary system, and then ended under the same regime. This compares to the current situation where mild deflation has continued for a substantial period of time and is finally coming to an end in Japan while expected inflation rates have been kept low globally amid the growing confidence in monetary policies since the 1990s. Due to these similarities we give particular attention to the deflation of the late 19th century.

It is generally perceived that the deflation of the late 19th century continued from 1873 through 1896. In this project, we undertake comprehensive analysis of deflation factors observed during this period as well as of the mechanism for getting rid of such factors by incorporating diverse viewpoints. We thus identify the similarities and dissimilarities between the deflation of the 19th century and the one we have today in Japan, thereby clarifying the mechanism for the current deflation.

Major Research Results

RIETI Discussion Papers

I-(2) Changes in determinants of TFP

3. Development of a RIETI Manufacturing Database and Study of Productivity by Industry

Leading Fellow(s)

Overview

To understand Japan's economic stagnation over the past decade and devise policies to break free of it, analyses of productivity, industrial structure, and trends in the rate of return on capital are essential. Increases in productivity will constitute the major source of economic growth in Japan in the years ahead as the work force dwindles. The rate of return on capital affects the level of capital investment and investment in education. This study will use industry-level and establishment-level data to analyze these factors.

In terms of empirical research at the industry level, with regard to manufacturing sector, it will develop a database for analyzing efficiency of resource allocation and productivity in each of the four-digit industries. The project will also revise the JIP database, which covers the macro economy as a whole at the industry level for three-digit industries.

Using these databases, the project will analyze how productivity has been affected by the IT revolution, the emerging division of labor with other countries, the transfer of production facilities overseas, and so forth. In addition, by integrating data from securities reports and corporate financial data, including that of unlisted companies, from JADE, CRD, et cetera, it will analyze trends in productivity and the rate of return on capital in the economy as a whole from an industry-level viewpoint. With regard to certain industries, the project will also conduct case studies regarding the impact of structural reform on productivity.

Major Research Results

RIETI Discussion Papers

4. Regulation of the Retail Sector, Market Competition, and Productivity

Leading Fellow(s)

Overview

The 1990s are considered "the lost decade" for the Japanese economy and low productivity in the non-manufacturing sector is regarded as one reason for the decade-long stagnation. This study will focus on an analysis of the retailing industry, which constitutes a major portion of the non-manufacturing sector.

In the 1990s, the government carried out regulatory reform geared toward large businesses through the repeal of the Large-Scale Retail Stores Law. At the same time, however, such systemic factors as tax provisions favoring "mom and pop" businesses remained in place. The study will examine the impact on productivity of this piecemeal approach to regulatory reform in the retailing industry.

In addition, this study will create panel data sets that longitudinally link micro data of the "Census of Commerce" by the Ministry of Economy, Trade and Industry and analyze market competition with a focus on the entry and exit of business establishment.

Major Research Results

RIETI Discussion Papers

5. An International Comparison of Productivity in East Asia

Leading Fellow(s)

Overview

An accurate assessment of Japan's industrial competitiveness and the progress of other countries in East Asia is important from a number of standpoints, particularly policymaking. This project aims to compile KLEM data (industrial input-output tables and data on capital and labor) using industrial categories common to five countries, South Korea, China, Taiwan, Japan, and the United States, and to compare productivity in these countries by industry since 1980.

In addition, the project will compile data on relative prices in each industry, compare productivity levels, and conduct an assessment of Japan's international competitiveness in each industry.

Major Research Results

I-(3) Structural reforms - implementation and their effects

6. A Scholarly Consideration of Institutional Design in Electricity Market Reform

Leading Fellow(s)

Overview

Deliberation on the details of institutional design for the liberalization of Japan's electricity market has continued after a framework for reform was decided by the Electricity Industry Committee of the Advisory Committee for Natural Resources and Energy, a consultative body to the Minister of Economy, Trade and Industry in late fiscal 2002. Nonetheless countless issues remain to be resolved, including the design of the wholesale electricity exchange scheduled to be launched in 2005.

Keeping in mind the unique technological aspects of the power industry, this study will attempt to develop a new "outside-the-box" approach by adopting an interdisciplinary perspective combining economics, engineering, and other fields. It will explore, from both a theoretical and empirical perspective, the best mix of regulatory and competitive policies to advance the electricity market beyond the limited reforms thus far adopted - including the establishment of a wholesale electric power exchange that includes a real-time market and futures market - with the goal of formulating policy proposals that can help accelerate the formation of an efficient electric power market.

Major Research Results

RIETI Discussion Papers

7. An Experimental Economic Approach to Institutional Design

Leading Fellow(s)

Overview

This project aims to analyze issues in economic and industrial policies by applying methods of experimental economics. Research activities for fiscal 2005 focus on the effectiveness of the "leniency program" -- which is to provide certain incentives to cartel participants for whistle-blowing -- to be introduced under the revised Antimonopoly Act (effective January 1, 2006). Using the Cournot competition as a basic model, we define cartel practices as a collusive behavior in a repeated game of such competition. We then examine which type of leniency program - penalty remission or reward - would be more effective in cracking down on and preventing cartel activities experimentally as well as theoretically. Based on the resulting findings, we develop and analyze a multi-market contact model a la Bernheim and Whinston (1990) that puts international cartel activities into focus. We also undertake a joint project on communication games with researchers from France and other countries.

Major Research Results

RIETI Discussion Papers

I-(4) Institutional complementarities between corporate and government governance

8. Division of Roles between the Public and Private Sectors under a Decentralized Regime: Empirical Studies on the Actual State and Roles of Local Governments' Special Account Budgets and Government-affiliated Organizations and on the Relevant Governance Mechanism

Leading Fellow(s)

Overview

Under the "trinity reform" of local public finance that has been undertaken since fiscal 2004, local governments are to take on greater responsibility -- instead of relying on the central government -- in managing their financial conditions. Toward this end, both the public and private sectors need to use their limited resources more efficiently by defining and focusing on areas of their respective strengths. However, economic analysis has yet to provide a clear picture of the actual state and governance of public organizations that are positioned between the public and private sectors. Under what sort of mechanism, can efficient division of roles between the public and private sectors be achieved or what sort of government structure should we pursue? Answers can likely be found for these questions by analyzing the actual state of public organizations as a whole, comparing local governments in terms of efficiency, and grasping differences in their attitude vis-a-vis the new framework brought by the trinity reform.

This project, which focuses on public corporations, seeks to identify and propose a governance mechanism that would enable the efficient division of roles between the public and private sectors by clarifying the actual state of public corporations based on surveys conducted by the Ministry of Internal Affairs and Communications.

Major Research Results

RIETI Discussion Papers

*Title Abbreviation SF: Senior Fellow / F: Fellow / FF: Faculty Fellow / CF: Consulting Fellow