NBER Reporter: Fall 2000

Japan Project

Members and guests of the NBER's Japan Project met in Tokyo on September 22 and 23. Magnus Blomstrom, NBER and Stockholm School of Economics; Jennifer Corbett, Oxford University; Fumio Hayashi, NBER and University of Tokyo; and Anil K Kashyap, NBER and University of Chicago, organized the following program:

Christopher D. Carroll, NBER and Johns Hopkins University, "'Risky Habits' and the Marginal Propensity to Consume Out of Permanent Income, or How Much Would a Permanent Tax Cut Boost Japanese Consumption?" (NBER Working Paper No. 7839)

Discussants: Toshihiro Ihori, University of Tokyo, and Adam S. Posen, Institute for International Economics

R. Anton Braun, International University of Japan, and Etsuro Shioji, Yokohama National University, "Monetary Policy and the Term Structure of Interest Rates in Japan"

Discussants: Naohiko Baba, Bank of Japan, and Eric Girardin, Université de la Mediterranée

Ramana Ramaswamy and Hossein Samiei, International Monetary Fund, "The Yen-Dollar Rate: Have Interventions Mattered?"

Discussants: Michael R. Darby, NBER and University of California, Los Angeles, and Kenichi Ohno, National Graduate Institute for Policy Studies

Michael W. Klein, NBER and Tufts University, Joe Peek, University of Kentucky, and Eric S. Rosengren, Federal Reserve Bank of Boston, "Troubled Banks, Impaired Foreign Direct Investment: The Role of Relative Access to Credit" (NBER Working Paper No. 7845)

Discussants: Akiko Tamura, Hosei University, and David E. Weinstein, NBER and Columbia University

Ulrike Schaede, University of California, San Diego, "Self-Regulation and the Sanctuary Strategy: Competitive Advantage through Cooperation by Japanese Firms"

Discussants: Motoshige Itoh, University of Tokyo, and Gary Saxonhouse, University of Michigan

Hiroshi Ono, Stockholm School of Economics, "An Empirical Look at the Earnings of Japanese Men: The Significance of College Quality, Occupations, and Firm Size"

Discussants: Yukiko Abe, Asia University, and Mark E. Rebick, Oxford University

Vidhan K. Goyal and Takeshi Yamada, Hong Kong University of Science and Technology, "Asset Price Bubbles, Liquidity, and Investment: Evidence from Japan"

Discussants: Fumio Hayashi, and Kenneth D. West, NBER and University of Wisconsin

Andrea Boltho, Oxford University, "Italian and Japanese Foreign Trade Performance: From Early Similarities to Present Diversity"

Discussants: Bernadette Andreosso-O'Callaghan, University of Limerick, and Michael M. Knetter, NBER and Dartmouth College

Robert Dekle, University of Southern California, "Exchange Rates and Corporate Exposure: Evidence from Japanese Firm-Level Panel Data"

Discussants: Colin McKenzie, Osaka University, and Yuri N. Sasaki, Takachiho University

Yoshiro Miwa, University of Tokyo, and J. Mark Ramseyer, Harvard University, "The Value of Prominent Directors: Lessons in Corporate Governance from Transitional Japan"

Discussants: Takeo Hoshi, University of California, San Diego, and Tetsuji Okazaki, University of Tokyo

Carroll examines an implication of models of habit formation in consumption that has been largely overlooked: habits strong enough to explain certain observed empirical puzzles imply an immediate marginal propensity to consume (MPC) out of permanent shocks of much less than one. When Carroll's model is calibrated to roughly match the rise in the Japanese saving rate over the postwar period, it implies that the immediate MPC out of permanent tax cuts may be as low as 30 percent. This suggests that calls for a permanent income tax cut as a quick means of stimulating aggregate demand may have only a limited effect.

Braun and Shioji consider the response of the term structure of interest rates to monetary policy in Japan. Following Uhlig (1999) they impose restrictions on the posterior distribution of parameters of a vector autoregression and the range of identification schemes to produce impulse responses that accord well with a priori beliefs that are widely held among economists. They then use the identified monetary policy shock to estimate the response of the term structure in two different models: one is based strictly on a theory of term structure, while the other is a "reduced form" empirical model.

Ramaswamy and Samiei estimate a simple forward-looking model of the exchange rate to show that, on the whole, foreign exchange interventions have had small but persistent effects on the yen-dollar rate. They find that, contrary to conventional wisdom, sterilized interventions have mattered. Consistent with conventional wisdom, coordinated interventions have a higher probability of success and move the yen-dollar rate by a larger margin than unilateral interventions. A probit model indicates that both an excessive appreciation and depreciation of the yen provoke interventions, and that interventions occur in clusters -- if there is one today, there likely will be another tomorrow.

Klein, Peek, and Rosengren show that unequal access to credit among Japanese firms can explain the foreign direct investment (FDI) puzzle of the 1990s. Using a unique dataset that links Japanese firms to their main banks, the authors find that financial difficulties at banks were important both economically and statistically in reducing the number of FDI projects by Japanese firms in the United States. This holds true even after the authors control for the effects associated with the relative wealth movements driven by macroeconomic fluctuations in the exchange rate and stock market prices. As a result, there is strong empirical evidence that differences across firms in the degree of their access to credit can be an important determinant of FDI.

With a "sanctuary strategy," a firm uses restraints to competition in its home market to create a profit cushion that allows it to compete forcefully in foreign markets. Schaede uses evidence from Japan to focus on the domestic prerequisites of a successful sanctuary strategy, arguing that self-regulation by trade associations is an important predictor of success. Using a dataset containing 1,153 Japanese trade associations, the author first tests standard notions of cooperation and collusion, then develops new hypotheses to analyze the relevance of internal features of trade associations for self-regulation. He concludes that as self-regulation increases in Japan, so may the sanctuary strategies employed by Japanese firms.

Ono explores why the rate of return (ROR) to college education in Japan is lower than in its Western counterparts. Using 1995 data on Japanese workers and their mean scores on college entrance exams, he considers the relationship between individual ability, college quality, and earnings in the Japanese labor market. He finds that: 1) college quality significantly improves earnings; 2) tenure effects are significant and positive only among high-school graduates (not among college graduates); 3) firm-size differences are manifested as an interaction effect with experience; and 4) the earnings profiles for blue- and white-collar workers are parallel. The huge variation in the ROR with respect to college quality that he estimates confirms in part that the obsessive pursuit of college quality in Japan is in fact rational. The mean ROR used in international comparisons thus understates the significance of college quality in Japan.

Goyal and Yamada examine investment spending of Japanese firms around the time of the asset price bubble in the late 1980s to understand how stock valuations affect investment. They show first that corporate investment responds significantly to nonfundamental components of stock valuations during asset price bubbles; fundamentals matter less. Second, they find that it is the investment of bank-dependent firms that responds significantly to nonfundamental valuations during asset price shocks. Finally, they show that the time-series variation in investment-cash flow sensitivity is affected more by monetary policy changes than by shifts in collateral values during asset price shocks.

In the 1950s Italy and Japan had similar factor endowments and foreign trade shares and structures, with revealed comparative advantage (RCA) concentrated in semi-manufactured goods and consumer goods. At the end of the 1990s, the two countries' export structures were radically different, as were their trade shares in output. Japanese RCA had shifted to high-tech and investment products; Italy's remained concentrated in consumer goods. Japanese manufactured imports, as a share of GDP, had stagnated; Italy's had soared. Boltho concludes that these starkly divergent evolutions are tentatively linked to a different corporate governance structure in the two countries and to different government policies towards industry.

Dekle tests whether Japanese exporters behave as joint profit maximizers or as Cournot competitors in foreign markets. He finds that of the 15 export industries in his sample, 10 industries are better characterized as Cournot competitors, rather than 23 as joint profit maximizers. He estimates that exposure elasticities (the percentage change in profits arising from a 1 percent change in exchange rates) are much higher for industries characterized as Cournot competitors. He also finds that for all specifications (joint profit maximization and Cournot) and industries, the impact of a change in the exchange rate on the yen profit margins of Japanese exporters is negligible. This leads the author to conclude that the profits of Japanese firms fall when the yen appreciates because foreign sales become smaller in yen terms.

Miwa and Ramseyer use data on firms in the cotton spinning industry in turn-of-the-century Japan to explore the relationship between board composition and firm profitability. Through a variety of regression estimates, the authors conclude that firms who hired nationally prominent directors in one year had higher profits than their competitors in succeeding years. These nationally prominent directors apparently brought basic monitoring skills that turned out to be valuable. The authors also find that although firms with visible directors may have had an advantage in the capital market, quality certification seems at most a by-product (if even that) of the monitoring and intervention services these directors performed.