Sectoral productivity, wage rates and economic growth in Japan

The Japanese economy has been experiencing very low growth rates for the last few decades. Japan’s low economic growth also reflects low to no growth rates for Japanese wages, per capita income, and inflation, among other economic indicators. Many studies in the literature exist that have attempted to explain the continuing low performance of the Japanese economy which has persisted since the late 1990s. Quantitative easing policies accompanied by a series of Bank of Japan’s massive money supply and low-interest rate policy initiatives have not seemed to have had significant impacts.  In particular, Japan’s deflationary trend is continuing despite the Bank of Japan’s explicit attempts to reverse it. In this paper, we first review the literature that presents possible reasons for this phenomenon, and then we present our hypothesis and empirically test it.

The factors that we consider contributing to Japan’s continuing low economic growth include changing comparative advantages and productivity of economic sectors; the declining population of working-age people; and outsourcing and outward foreign direct investment that have moved Japan’s employment to other countries (which include both low and high wage countries). We hypothesize that Japan’s increasing policy demand for various equalizing payments and limited success in economic growth policies over time have resulted in little economic growth. In our empirical analysis we will use both cross-sectional and time series data.

We pay particular attention to the implications of the changing comparative advantages of the Japanese economy (particularly firms), aging, and Japan’s policies for welfare, health, regional transfer payments and income balancing policies for economic growth for the Japanese economy.