Electricity Supply and Industrial Specialization: A neoclassical evaluation on Japan's electricity supply constraints

Since the nuclear power plant accident caused by the Great East Japan Earthquake, business and policy makers have raised serious concerns about the impact of electricity supply constraints on the Japanese economy. This paper examines the extent to which electricity supply constraints would affect manufacturing production in Japan. For this purpose, an empirical model based on a standard-neoclassical trade model is estimated for gauging how sectoral output share is influenced by electricity capacity and productivities, using panel data from 1990-2008 for 15 Organisation for Economic Co-operation and Development (OECD) countries and 12 manufacturing sectors. Our estimates suggest that the impact of productivity-adjusted electricity capacity (effective capacity) on industry output is generally rather small relative to that of the industry's own total factor productivity (TFP), and this tendency is more acute in the short-run. However, decreases in effective capacity will negatively affect output share in several industries including electrical equipment, transport equipment, and machinery. Japan tends to have high output share in these sectors relative to other OECD countries, which implies that electricity supply constraints may weaken its comparative advantage.