Trade and Transmission of Endogenous Growth Effects: Japanese Economic Reform as an Externality for East Asian Economies

The Japanese economy has fallen well below its potential output path over the last decade. The cost of this economic stagnation has been borne in significant part by Japan’s trading partners, East Asian countries in particular, as they have seen withering export markets and attenuated inflows of innovative imports, technology, and investment capital. Using a dynamic calibrated general equilibrium (CGE) model, we examine the implications of externalities like this turning positive: how structural reform and greater productivity growth in Japan would induce economic benefits elsewhere in the region. Our preliminary findings suggest that, while Japanese growth appears to be neither necessary nor sufficient for aggregate expansion among its regional trading partners, very different trade patterns would prevail for most of them if Japanese reforms are effective, and there will also be significant positive spillovers. The precise nature of these effects, however, depends critically upon the microeconomics of the structural reform and recovery in Japan and on the composition of trade with each partner country.