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What explains the recent fluctuations in Japan's output? A structural factor analysis of Japan's industrial production

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Listed:
  • Yusuke Kumano

    (Bank of Japan)

  • Ichiro Muto

    (Bank of Japan)

  • Akihiro Nakano

    (Bank of Japan)

Abstract

Since the mid-2000s, Japan's industrial production (IP) has been characterized by increasing volatility. To examine the background to this, we apply the structural factor analysis developed by Foerster, Sarte, and Watson (2011) and decompose variations in Japan's IP into aggregate and sectoral shocks taking input-output relationships between sectors into account. We find that aggregate shocks explain most of the fluctuations in Japan's IP and are highly correlated with variations in overseas economic growth, especially since the early 2000s. However, we find a large increase in the relative importance of sectoral shocks when focusing on the more recent increase in the volatility of IP. Specifically, our analysis suggests that the intersectoral spillovers brought about by the disruptions of supply chain network in the wake of Great East Japan Earthquake and the declines of domestic production (or production capacity) in some sectors as a result of a deterioration in global competitiveness or the shift to overseas production have contributed to the recent fluctuations of Japan's IP.

Suggested Citation

  • Yusuke Kumano & Ichiro Muto & Akihiro Nakano, 2013. "What explains the recent fluctuations in Japan's output? A structural factor analysis of Japan's industrial production," Bank of Japan Working Paper Series 13-E-10, Bank of Japan.
    • Handle: RePEc:boj:bojwps:13-e-10
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    References listed on IDEAS

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    1. Andrew T. Foerster & Pierre-Daniel G. Sarte & Mark W. Watson, 2011. "Sectoral versus Aggregate Shocks: A Structural Factor Analysis of Industrial Production," Journal of Political Economy, University of Chicago Press, vol. 119(1), pages 1-38.
    2. Kimura, Takeshi & Shiotani, Kyosuke, 2009. "Stabilized business cycles with increased output volatility at high frequencies," Journal of the Japanese and International Economies, Elsevier, vol. 23(1), pages 1-19, March.
    3. Shin-Ichi Fukuda & Munehisa Kasuya, 2012. "A Rise Of China And The Japanese Economy: Evidence From Macro- And Firm-Level Micro-Data," China Economic Policy Review (CEPR), World Scientific Publishing Co. Pte. Ltd., vol. 1(01), pages 1-27.
    4. Ichiro Muto & Nao Sudo & Shunichi Yoneyama, 2023. "Productivity Slowdown in Japan's Lost Decades: How Much of It Can Be Attributed to Damaged Balance Sheets?," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 85(1), pages 159-207, February.
    5. Yoshikawa, Hiroshi, 1995. "Macroeconomics and the Japanese Economy," OUP Catalogue, Oxford University Press, number 9780198233268.
    6. TOKUI Joji & ARAI Nobuyuki & KAWASAKI Kazuyasu & MIYAGAWA Tsutomu & FUKAO Kyoji & ARAI Sonoe & EDAMURA Kazuma & KODAMA Naomi & NOGUCHI Naohiro, 2012. "The Economic Impact of the Great East Japan Earthquake: Comparison with other disasters, supply chain disruptions, and electric power supply constraint (Japanese)," Policy Discussion Papers (Japanese) 12004, Research Institute of Economy, Trade and Industry (RIETI).
    7. Xavier Gabaix, 2011. "The Granular Origins of Aggregate Fluctuations," Econometrica, Econometric Society, vol. 79(3), pages 733-772, May.
    8. Konomi Tonogi & Katsuaki Ochiai & Kazumi Asako, 2010. "Business Cycles in Japan and in Asian Countries : Tests of Comovements between CI and Trade Statistics," Public Policy Review, Policy Research Institute, Ministry of Finance Japan, vol. 6(2), pages 237-260, March.
    9. Long, John B, Jr & Plosser, Charles I, 1983. "Real Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 39-69, February.
    10. Naohito Abe, 2004. "The Multi‐Sector Business Cycle Model and Aggregate Shocks: An Empirical Analysis," The Japanese Economic Review, Japanese Economic Association, vol. 55(1), pages 101-118, March.
    11. Mitsuhiro Osada & Takuji Kawamoto, 2007. "Stabilization in the Volatility of Output: A Decline in Cross-industry Comovements," Bank of Japan Review Series 07-E-6, Bank of Japan.
    12. Iyetomi, Hiroshi & Nakayama, Yasuhiro & Yoshikawa, Hiroshi & Aoyama, Hideaki & Fujiwara, Yoshi & Ikeda, Yuichi & Souma, Wataru, 2011. "What causes business cycles? Analysis of the Japanese industrial production data," Journal of the Japanese and International Economies, Elsevier, vol. 25(3), pages 246-272, September.
    13. T. Miyagawa & Y. Sakuragawa & M. Takizawa, 2006. "Productivity And Business Cycles In Japan: Evidence From Japanese Industry Data," The Japanese Economic Review, Japanese Economic Association, vol. 57(2), pages 161-186, June.
    14. James H. Stock & Mark W. Watson, 2012. "Disentangling the Channels of the 2007-2009 Recession," NBER Working Papers 18094, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Iiboshi, Hirokuni & Matsumae, Tatsuyoshi & Namba, Ryoichi & Nishiyama, Shin-Ichi, 2015. "Estimating a DSGE model for Japan in a data-rich environment," Journal of the Japanese and International Economies, Elsevier, vol. 36(C), pages 25-55.
    2. Takaoka, Sumiko, 2018. "Convenience yield on government bonds and unconventional monetary policy in Japanese corporate bond spreads," MPRA Paper 86418, University Library of Munich, Germany.

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    More about this item

    Keywords

    Industrial Production; Structural Factor Analysis; Lehman Shock; Great East Japan Earthquake; Supply Chain Network; Input-output Matrix;
    All these keywords.

    JEL classification:

    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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