Japan: Study examines causes of slump in business investment in the 1990s

• Pages: 382-384

Page 382

IMF Survey: What led you to examine the decline in Japan's business investment?

Ramaswamy: Over 1991-98, the Japanese economy grew at an average of VA percent a year. In the 1980s, it had grown at 4 percent a year. Trying to explain what happened in the 1990s led me to look at business investment, and ultimately to ask why investment collapsed.

Ramaswamy: If you want to look at what happened to Japanese business investment, you must look at the structural factors.

It is fairly well known that the collapse of Japanese equity and land prices in the early 1990s precipitated the crisis. What is less well known is that, unlike other countries that had had an asset price bubble burst- notably Sweden and the United Kingdom-Japan did not experience a subsequent collapse in private consumption expenditure. Instead, it experienced a severe decline in business investment.

The share of business investment in GDP fell from about 20 percent in 1990 to about 16 percent in 1998. To view this decline from an international perspective, the share of business investment in GDP in Japan was about 11 percentage points higher than in the United States in 1990. Now, following the slump that persisted for several years, the share of business investment in

GDP is just about 3 percentage points higher than in the United States. The 1990s was not only a period during which business investment collapsed dramatically in Japan, but also a period in which the United States experienced a structural increase in investment. All this makes a study of the causes of the slump in business investment in Japan particularly interesting.

IMF Survey: What does your study aim to do? Ramaswamy: Quite a few explanations have been offered for the decline in Japanese business investment. Some of these are based on fact, some, on study, and some, simply on observers' biases and speculations. My study examined the principal explanations that have been offered so far and attempted to see to what extent they made sense in the Japanese context. The study also provided econometric estimates of the determinants of aggregate business investment in Japan.

IMF Survey: Why did Japan's business investment decline so steeply in the 1990s?

Ramaswamy: There are four major theories. The first is that an excessive buildup of debt served as a drag on investment. Japanese firms got themselves indebted in a big way in the 1980s, as did Korea and other Asian countries. This theory argues that Japan in the 1990s faced the consequences of the buildup of that debt. A second theory is that the steep decline represented an unwinding of the...