The Japanese Stagnation: An Assessment of the Productivity Slowdown Hypothesis

Abstract

The paper analyses the process of long-run growth in Japan over the period 1957-2001, using a common trends model, in order to asses whether the economic slowdown in Japan over the 1990s has been caused by a productivity slowdown. The paper finds empirical support for the neoclassical growth model: the long-run evolution of the economy may be related to two persistent shocks which bear the interpretation of productivity and labour supply shocks. Coherent with the simulation results of Hayashi and Prescott (2002), it is found that, over the 1990s, the potential output path has been characterised by both a reduction in level and slope. Since supply side reforms are still in their infancy, it is likely that the recovery of the Japanese economy is going to be a long lasting process.

Keywords: Japan, common trends, economic growth

JEL Classification: C32, O11