Policy Update 028 Pre-event Interview No.2

TFP and Prospects for the Japanese Economy

Samuel W. Morris University Professor, Department of Economics, Harvard University

As Japan emerges from recession and its economy approaches cruising speed, the potential growth rate of the Japanese economy is an increasingly important factor in determining the path to restore fiscal health and conducting monetary policy. It has been recognized that the main source of growth for Japan, which faces serious population decline in the coming years, is the increase in total factor productivity (TFP). Therefore it is urgent to recover Japanese TFP growth, which has been at a standstill since the 1990s. This stagnation in productivity growth and its increasing gap with the U.S. are globally recognized, and also not unique to Japan. Europe is experiencing a similar phenomenon. The RIETI Policy Symposium, "Determinants of Total Factor Productivity and Japan's Potential Growth: An International Perspective," on July 25, 2006 will be based on the results of its projects on industry- and firm-level productivity and international comparison of productivity in East Asian and other countries. In the symposium, Japanese and overseas experts on TFP will provide insight on the future strategy of Japan's economic growth and productivity. RIETI interviewed symposium presenter Dr. Dale W. JORGENSON about the impact of TFP on Japanese economic growth and the synergy between economic data and policy.

Dale W. Jorgenson is the Samuel W. Morris University Professor at Harvard University. After teaching at the University of California, Berkeley, he joined the Harvard faculty in 1969. He served as Chairman of its Department of Economics (1994-'97). Dr. Jorgenson was also the Director of the Program on Technology and Economic Policy of the Kennedy School of Government (1984-2005). His research interests cover information technology and economic growth, energy and the environment, tax policy and investment behavior, and applied econometrics. He received a B.A. in Economics from Reed College and a Ph.D. in Economics from Harvard University. Dr. Jorgenson has been conferred membership in various prestigious scholarly organizations including the Royal Swedish Academy of Sciences (1989) and the American Philosophical Society (1998). He has won numerous awards such as the John Bates Clark Medal of the American Economic Association (1971) and the Adam Smith Award of the National Association for Business Economics (2005). In addition, he has been awarded honorary doctorates by Uppsala University (1991), the University of Oslo (1991), Keio University (2003), the University of Mannheim (2004), and the University of Rome (2006). Dr. Jorgenson has a vast number of publications to his credit, recently including Econometrics, vol. 3 of Economic Growth in the Information Age (MIT Press, 2002); Productivity, vol. 3 of Information Technology and the American Growth Resurgence (with Mun S. Ho and Kevin J. Stiroh), (MIT Press, 2005); and "Blueprint for Expanded and Integrated U.S. National Accounts: Review, Assessment, and Next Steps," (with J. S. Landefeld) in A New Architecture for the U.S. National Accounts, eds. D. W. Jorgenson, J. S. Landefeld and W. D. Nordhaus, (University of Chicago Press, 2006).

RIETI: As the source of U.S. growth acceleration after 1995, you suggest that "the contribution of capital input is the most important, total factor productivity [TFP] is next, and the contribution of labor input is almost negligible." However, in Japan, TFP is commonly thought to be as important as capital input. How do you interpret this difference?

Jorgenson: I think that opinion in Japan may be based on an earlier view of the sources of growth. Fortunately, recent work on productivity at RIETI, the Economic and Social Research Institute, and Keio University reflects the newer perspective. This perspective treats capital input in the same way as labor input, as a flow of services rather than a stock of assets. This greatly increases the relative importance of capital input and substantially downgrades the role of TFP. Readers who would like to learn more about this could consult the special issue on productivity published in the December 2005 issue of the Journal of the Japanese and International Economies.

RIETI: In your paper "Information Technology and the Japanese Economy," you conclude that the rising contribution of TFP in the IT sector after 1995 indicates that long-term prospects for the Japanese economy are not as bleak as the official statistics might suggest. Could you provide us with some insight on this?

Jorgenson: The growth rate of average labor productivity in Japan during the 1990s has been quite impressive. Looking into the future, the slowdown in the growth of the Japanese labor force provides unusual opportunities for enhancing labor productivity growth through capital deepening. This is defined as increasing the ratio of capital input to labor input. The growth of labor quality in Japan, due to changes in the composition of the labor force by education and experience, is also likely to be quite high. Finally, the growth of total factor productivity in the IT-producing sectors like computers and telecommunications equipment, as well as the IT-using sectors like communications and financial services, will continue at the high rates established after 1995.

RIETI: You note that policymakers are attempting "to fill the widening gaps between the available economic data and the information required for sound economic policy." What suggestions do you have in this regard?

Jorgenson: I have in mind the excellent research of the members of RIETI's Japan Industrial Productivity (JIP) project led by RIETI Faculty Fellow Kyoji Fukao of Hitotsubashi University. In addition, the Economic and Social Research Institute has undertaken a major project to improve the measurement of capital stock and capital input in Japan. Both of these projects will contribute to narrowing the gaps between the data available and the information required for formulating a sound view of potential economic growth in Japan. These projects will bring the official Japanese data into line with the methodologies that are now current in Europe and North America, as reflected in the OECD Productivity Manual, authored by Paul Schreyer in Paris.

The above interview originally appeared in RIETI Report on July 14, 2006.Interview conducted by Takako Kimura, Online Editor, on July 13, 2006.

Pre-event Interview No.1
"EU Playing Catch-up with Productivity Growth" by Marcel TIMMER, Assistant Professor, Department of Economics, University of Groningen

Pre-event Interview No.2
"TFP and Prospects for the Japanese Economy" by Dale W. JORGENSON, Samuel W. Morris University Professor, Department of Economics, Harvard University

July 14, 2006

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