Demand shock propagation through input-output linkages in Japan

Focusing on the sharp declines in exports during the global financial crisis and consumption during the COVID-19 pandemic, we empirically estimate the propagation of demand shocks from customers to their suppliers through firm-level input-output linkages in Japan. We find economically significant propagation of demand shocks and show that the strength of the propagation depends on firm sizes. During the global financial crisis, negative demand shocks hitting large exporters propagate to their large suppliers but not to their small suppliers. In contrast, during the pandemic, most of the firms damaged by the pandemic are small, and the negative demand shocks hitting these small firms also propagate to their small suppliers. Our results highlight the heterogeneous nature of demand shock propagation across firms, suggesting the existence of a specific route in an input-output network through which demand shocks easily propagate.