Macro Effects of Corporate Restructuring in Japan

This paper presents a framework for quantitatively evaluating the macroeconomic effects of corporate restructuring and applies that framework to Japan. Using firm-level financial statement data, this paper estimates total factor productivity of individual Japanese firms. Given the estimated distribution of productivity across firms, this paper simulates the effect of optimal restructuring, that is, reallocation of resources from less-productive firms to more-productive ones, on the dynamic path of aggregate output. In a benchmark case, aggregate output declines by 0.8 percent in the year of restructuring, but converges to a level 1.6 percent above its initial level in the medium term. The present value of net output gains from restructuring over 20 years amounts to 15 percent of the initial output under a 5 percent discount rate, suggesting that the benefits of restructuring may exceed the costs. With different assumptions, the present value of net output gains could range between 13 percent and 31 percent of the initial output.