Does Financial Risk Explain Japan’s Great Stagnation?
概要
Japan has experienced a long-lasting stagnation since the early 1990s. According to the Reference Dates of Business Cycle, the Cabinet Office of Japan, there are four recession periods between 1987 and 2010, and three of them are considered to be financially-related. This implies that the stagnation wastriggered by financial factors. Nonetheless, many studies using Dynamic Stochastic General Equilibrium models claim that a decline in Total Factor Productivity is the main driver of the stagnation. To resolve this contradiction, this study estimates the Japanese economy by a New-Keynesian DSGE model augmented with financial friction used in Christiano, Motto and Rostagno (2014), where “risk shock” is newly incorporated into the model that refers to uncertainty in the financial market. According to our estimationresults, the estimated risk shock can explain the overall fluctuations of GDP and investment, and thus it isconsidered to be the main driver of the stagnation. We also find that it is highly correlated with the Business condition Diffusion Index, the Financial Position Diffusion Index and the Lending Attitude Index of Financial Institutions in Tankan released by the Bank of Japan. Therefore, we conclude that the estimated risk shock can be interpreted as the firms’ distrust toward their business conditions, and it delayed theirinvestment decisions, then causing the prolonged economic contraction.
