Download Structural and Cyclical Movements of the Current Account in Japan

Structural and Cyclical Movements of the Current Account in Japan
: An Alternative Measure*
Yoichi Matsubayashi
Graduate School of Economics
Kobe University
Abstract
The purpose of this study is to analyze fluctuations in the current account in Japan by
deconstructing structural and nonstructural components with a new method. The study shows that at
the beginning of the 1980’s, most components of the current account in Japan were structural. After
the Plaza agreement in 1985, however, Japan’s structural current account sharply decreased. Since
the end of 1990s, the structural components increased again and reached nearly 2% of GDP and
these movements are generally associated with the structural components of equipment investment
and public deficit. Business fluctuations in Japan and world, especially in the U.S. play an important
role in the nonstructural current account. Cyclical movements of the current account are remarkable
because they include periods of recession, and this tendency was notable in the 1990s.
JEL Classification Number: F32; F41
Keywords : Structural current account, Dynamic optimization; Permanent income, Tobin’s q,
Real exchange rate
Correspondence to :
Yoichi Matsubayashi Ph.D,
Graduate School of Economics, Kobe University
Rokkodai, Nada-Ku, Kobe, 657-8501
Japan
TEL +081-78-803-6852
E-mail [email protected]
1. Introduction
*
This paper is a revised version of a paper presented at the International Bureau of Ministry of Finance on “Mid- and
Long-term Analysis of the Current Account in Japan,” December 21, 2001. I am indebted to Kanemi Ban (Osaka
University), Kazumasa Iwata (Bank of Japan), Kyoji Fukao (Hitotsubashi University) and Tetsuo Kabe (Ministry of
Finance).
1
Considerable interest has been directed at the ability of industrial countries to generate
savings and to distribute these savings to other countries since the beginning of the 1990’s. This
has been due to the global shortage of savings. A noteworthy example is Japan’s financing of the
U.S due to the huge current account deficit of America. In particular, the huge current account
deficit of the U.S. has largely been financed by Japanese savings. Japan has been the major
source of capital for the United States since the early 1990’s. However, since the end of 1990s
Japanese trade surplus has begun to decrease and questions remain as to whether the present
large current account surplus in Japan is sustainable, and whether or not Japan will continue to
direct its capital toward the U.S and the rest of the world.
The above problems necessitate answers to the questions. More specially, to what extent will
the Japanese current account surplus continue, and what are the structural parts of the current
account in Japan. Actually little is known about these despite their importance. Any
deconstruction of the current account into structural and cyclical components is not easy to test
empirically. Moreover, how to test what methodology is used still an open question. Most
researchers have observed the following steps. At first, savings and investment functions with
the GDP and other key variables are estimated. Second, the full-employment GDP are
substituted into the above estimation and fitted values are stored. Third, the fitted values
(calculated in Step 2) are put into the current account identity and an estimate of the
full-employment current account are obtained. Most researchers regard this estimate as a
structural component of the current account. At last, the cyclical component of the current
account is derived by subtracting the value calculated in Step 3 from the real current account.
The current account level calculated in Step 3 is variously called the “structural current
account,” “full employment current account,” “trend current account,” or “equilibrium current
account”. Pioneering work based on the above steps has been done by Ueda (1988). First, he
developed a two-country macroeconomic model in which savings and investment determine the
level of the current account. Second, he estimated the structural or autonomous components of
these functions over the period of 1971-1984. Then, he estimated an equation that relates the
current account to these components and cyclical variables. His conclusion was that most
components of Japan’s current account at the beginning of the 1980’s were structural and the
U.S. budget deficit in that period had been responsible for the structural part of the Japanese
current account.
The work of Fukao (1987), which was examined over the period of 1979Q(1)-1984Q(4),
extended Ueda’s work by considering export/import prices and exchange rates. His conclusions
are summarized that at the beginning of the 1980’s most parts of the current account in Japan
were structural because of the restraint of government expenditure. Honma et al (1987), over the
period of 1970-1983, and Chigira and Takeda (1992), over the period of 1980Q(1)-1990Q(2),
2
constructed small macro econometric models and concluded that in the 1980’s the fluctuations
in Japan’s current account in the 1980’s could be explained by structural factors.
Recently, Clarida and Prendergast (1999) empirically examined the movements of the recent
G3 current account by time series analysis. They estimated the structural VAR, which is
constructed by the current account, home GDP growth, world GDP growth, and real exchange
rate, over the period of 1980Q(1)-1997Q(2). Then, they defined the structural component of a
country’s current account as a projection conditional on past variables equal to their respective
long run means. They concluded that the big surge in the U.S current account deficit since 1994
has been cyclical, and that the surge in the Japanese current account surplus since middle of
1996 has also been cyclical.
The above studies have succeeded in deconstructing the current account into structural and
cyclical components to some degree, but some problems remain. The first problem is that the
potential GDP may still contain cyclical movements; cyclical parts of the current account can
get mixed with structural parts. The second problem is that the savings and investment functions
are not necessarily derived from the optimal problem. As Shinkai (1985) has clearly explained,
the structural current account should be derived based on a micro-structure of agents (such as
preferences and technologies), and therefore, an optimization-based econometric framework is
indispensable.
Based on the above problems, this paper re-examines the causes of the large surpluses in
Japan’s current account and the causes of the large deficits in the U.S current account since the
mid-1970’s to the 1990’s with an alternative measure. Here, there are two distinct analytical
differences from earlier works. First, the concept of the “structural current account” is redefined.
In this paper, the “structural current account” involves the parts of the current account explained
by the optimal behaviors of individuals under an economy of full employment. Private savings,
residential investment, equipment investment and inventory investment functions are derived
based on the intertemporal optimal behaviors of individuals.
The past decade has been a period in which large amounts of theoretical literature have been
produced on intertemporal approaches to the current account derived from intertemporal
optimization by forward-looking agents. Obstfeld and Rogoff (1996) offer the most
comprehensive framework with their approach. The approach in this paper goes along the same
stream as their approach.
The second difference is that this work considers real exchange rate effects on the
saving-investment balance, especially on private investment. It is well known that in the
neoclassical saving-investment balance approach, in which both savings and investment are
determined by the full employment GDP and real interest rate, the real exchange rate is
determined in such a way that it is consistent with the level of the trade balance, which in turn is
3
determined by the savings and investment. If savings and/or investment are affected by the real
exchange rate, however, an equilibrium real exchange rate is determined so as to clear the goods
market.
Classical literature on the relationship between the terms of trade (or real exchange rate) and
the current account includes Haberger (1950) and Laursen and Metzler (1950). These people
have shown that an improvement in the terms of trade raises real income and therefore increases
private savings and the current account. Since the 1980s, Obstfeld (1982), Svensson and Razin
(1983), Perron and Svensson (1985), Frenkel and Razin (1987) and Ostry (1988) have been
developing a theoretical relationship between the terms of trade and savings in an intertemporal
utility maximizing framework1) . However, some empirical studies such as Sachs (1981) and
Glick and Rogoff (1995) emphasize that main fluctuations of the current account are caused by
investment rather than savings.
Based on the above research, this paper empirically examines the impact of real exchange
rates on the main factors determining savings and investment. Then, reflecting empirical facts,
structural and non-structural movements in the current account in Japan are calculated.
The contents of the paper are as follows: In Section 2, the basic framework of this analysis is
presented. In Section 3, the calculations of data are summarized. Estimation results are shown in
Section 4. In Section 5, the impact of real exchange rates on the main factors determining the
movements of savings and investment is discussed. Then, the current account is deconstructed
into structural and non-structural components and the determinants of the non-structural parts
are examined. Some conclusions are given in Section 6.
2．The Model
This section extends an open economy model developed by Obstfeld and Rogoff (1996)and
McKibbin and Sachs (1991). The economy faces world real interest rate and consist of three
sectors which are households, firms, and the government.
2-1 Household
The representative agent has full access to perfect international capital markets and chooses
1)
There has been few empirical research with the exception of Deardoff and Stern (1978) and Ostry
and Reinhart (1992).
4
its consumption path so as to maximize its lifetime utility．The utility of the agent in any period
is written as an additively separable function of the consumption of non-durable goods
( Cs )and housing stock ( H s ).

Et   stU Cs 
(2-1)
s t
U Cs    log Cs  1    log Hs
(2-2)
where
Cs : Real consumption expenditure in period s
H s ：Real housing stock at the end of s
 ：Subjective discount rate
E t ：Mathematical expectation operator conditional upon the information set in period t
The constraints are as follows.


BH s  Vs xs  1  rs BH s 1  d s  Vs xs 1  1   hs ws Ls  ps Cs  ps RC s
c
h
(2-3)
RCs  H s  1   h  H s1
(2-4)
BH s  BFH s  BGH s
(2-5)
where
BFH s ：Real foreign assets held by households at the end of s
BGH s ：Real domestic bonds held by households at the end of s
BH s ：Real risk-free assets held by households at the end of s
d s ：Real cash-flow in period s
Ls ：Employee in period s
c
p s ：Price index of consumption goods in period s (Deflated by the price index of
production goods)
5
h
ps ：Price index of residential investment goods in period s(Deflated by the price index of
production goods)
rs ：Real world interest rate in period s
RCs ：Real residential investment in period s
Vs : Real equity price in period s
ws ：Real wage rate in period s
x s ：Share of cash-flow owned by household at the end of s
 h ：Tax rate on household income in period s
s
 h :Depreciation rate of housing stock
The financial wealth of households includes equity and risk-free assets. Net revenue consists
of real financial wealth, plus after tax labor income, less expenditure on consumption, and
residential investment. Risk-free assets are defined as domestic government bonds( BGH s ) and
foreign private assets( BFH s ).
Maximizing (2-1) with respect to Cs and H s , subject to (2-3) and (2-4), gives the
following three conditions. At first, The arbitrage condition which household is indifferent on
the margin between risk-free assets (domestic asset, foreign asset and government bond )and
domestic equity.
1  rt 
Et dt 1  Vt 1 
Vt
(2-6)
The second equation which is shown in (2-7) represents the users cost of housing stock. The
users cost is the net selling expenditure of purchasing one unit of housing stock at period of t
and buying at period of t+1.


 t   pt h 
1  h
 1
Et p h t 1  c
1 r
p t


(2-7)
The third conditions are the optimal consumption of non-durable goods and the holding of
housing stock as shown in (2-8) and(2-9).

Ct   1     NHWt  HWt  p c t

(2-8)
6

H t  1     NHWt 1  HWt 1  p c t 1t 1

(2-9)
NHWt  1  r  BH t   d t  Vt  x t  p h t 1   h  H t 1
(2-10)
   1  st

HWt  Et  
 1   hs ws Ls 
 st  1  r 

(2-11)
The solution for the consumption of non-durable goods (2-8) is a familiar life-cycle
permanent income (abbreviated as LCY-PIH) model, i.e, a function of real wealth, which
comprises non-human wealth ( NHWt ) and human wealth ( HWt ). Non-human wealth in this
model shown in (2-10) consists of risk-free assets assets (foreign asset and government
bond ),equity and housing stock2). (2-11) represents the human wealth which is the future
discount stream of after tax labor income so called permanent income. The optimal holding of
housing stock shown in (2-9) is similar to the consumption decision of non-durable goods. The
difference is that the permanent income is adjusted by the users cost of housing stock specified
in (2-7). If the purchasing cost is relatively high compared with buying gains, hence the users
cost increase and permanent income adjusted by the users cost will reduce and the consumption
for housing stock will restraint. Then optimal holding for housing stock for household depends
on expected lifetime resources refined as the sum of initial real non human wealth and the
present discount value of future expected income adjusted by the users cost housing stock.
2-2 Firm
A representative firm maximizes the total wealth which consists of present discount value of
current and future cash-flow as shown in Equation.(2-12).
 1 

Wt  dt  Vt  Et  
s  t  1  rs 

s t
ds
(2-12)
d s  1   Fs Ys  ws Ls   p I s I s  p z s IVt
2)
(2-13)
The land stock is an important non-human wealth in Japan. Nonetheless, it is not included in this model.
7
Ys  F  K s , Ls   GI  K s , I s   GIV  H s , IVs 
F  K s , Ls   As K s Ls

1
(2-14)
As  0
(2-15)
GI  K s , I s  
  Is2 
0
 
2  Ks 
GIV ( H s , IVs ) 
0
2
IVs2 
1
2
HVs2
(2-16)
0  0, 1  0
(2-17)
K s  1   F K s 1  I s
(2-18)
HVs  HVs 1  IVs
(2-19)
where
As : Productivity in period s
d s : dividends in period s
F ( . ) : Production function
GI(. ) : Adjustment cost in the equipment investment
G I V(. ) : Adjustment cost in the inventory investment
HVs : Real inventory stock at the end of period s
I s : Real equipment investment in period s
IVs : Real inventory investment in period s
K s : Real capital stock at the end of period s
psI : Price index of investments goods in period s (Deflated by the price index of production
goods)
Z
s
p : Price index of inventory investment in period s (Deflated by the price index of
production goods)
Wt : Real corporate total wealth at the of t
Ys : Real total sales in period s
 F : Depreciation rate of capital stock
 Fs : Tax rate on corporate profits in period s
8
The representative firm chooses the optimal level of equipment and inventory investment and
as well as the inputs and production so that the value of the firm can be maximized. The value
of the firm is defined as a discounted sum of future dividends. Dividends in period s consists of
After tax corporate income ( 1   Fs Ys  ws Ls  ), plus net financial liability less equipment and
inventory investment expenditure. The firm faces adjustment costs in the equipment
investment, G K s , I s  , it changes its capital stock and faces adjustment costs in the inventory
investment, GIV ( H s , IVs ) . The firm then chooses optimal levels for the equipment
investment, inventory investment, as well as the current input and production, to maximize its
value2) . Maximizing (2-12) subject to (2-18),(2-19) and (2-22) gives the following conditions3):
I
It
pt
1
 qt  1
Kt 
1   Fs 
1  F 
qt  Et  

s t  1  r 

s t
(2-20)
s t


  s 
GI s  I s 
1  F  
 
 1   Fs 
1   Fs    Et  
I s  K s 
s t  1  r 
 K s 


(2-21)

 s  As K s Ls
1

  Is2 
   ws Ls
2  Ks 
(2-22)
Equation (2-20) is rewritten as a relationship in which the optimal investment ratio is a positive
function of q. The economic implication of q is shown in Equation.(2-21). It represents the
future stream of the profit rate and the marginal change of the adjustment costs4). The profit rate
2)
The real total sales is defined as the subtraction of the adjustment costs in equipment and inventory
investment from the production level This assumption is followed by Ogawa and Kitasaka (1998).
1  F 
qt is the Lagrange multiplier of the constraint (2-21) is qt . lim T  Et 
 qt T  0 which is the
T
3)
 1 r 
transversality condition in terms of the optimal equipment investment rule is assumed for derive in (2-20).
4)
The iterative substitution applied to the first order condition for
1  F 
leads to q  E

t
t

s t
 1 r 
s t
Kt
incorporating the transversality condition
2


  I s    . Considering the homogenity of the production

1   Fs  FK s     
2  Ks   



9
expressed as Eq.(2-22) is the before-tax profits devided by the real capital stock. From
Eqs.(2-20),(2-21) and (2-22), the optimal investment is a function of the expected profitability
so called Tobin’s marginal q.
The optimal inventory investment is derived as the following steps. Combining the first
conditions for inventory investment and inventory stock yields a stochastic Euler equation
associated with the inventory investment.


ptZ  1   Fs b0 HVt  HVt 1   b1HVt 1  Et ptZ1  1   Fs b0 HVt 1  HVt 
(2-23)
where

1
1 r
Let’s assume that the price index of the inventory investment follows a first-order
autoregressive process5):
 1
ptZ  ptZ1   t
(2-24)
 t ～N  0,  2 
Et  t 1   0
Substituting Eq. (2-24) into Eq.(2-23) and expressing the result by the lag operator( L ) leads to

 



Et 1   Fs  b0 L  L2  b1L  b0 1  L  HVt 1    1 ptZ
(2-25)
Equation (2-25) is a second-order non-homogenous difference equation and it can be rewritten
using the roots of the characteristic equation.
Et 1  1L 1  2 L HVt 1     1 ptZ
(2-26)
where 1 and  2 are the roots of the characteristic equation of (2-25). Moving Eq. (2-26) one
period backward and differentiating the equation yields the optimal inventory equation as
function and the adjustment cost function, with this equation yields Equation (2-21).
5)
The assumption that the lag length of auto regressive process is first-order is made to simplify the analysis. The
extension of this assumption is an important task for future research.
10
follows5) :

IVt  c0 IVt 1  c1 ptZ1  ptZ2

(2-27)
c0  1
0  1  1

c1    11 1   1

1
0
Equation (2-27) indicates that the current inventory investment is affected by the lag and the
fluctuation of the inventory price. The inventory investment in this model involves mainly
finished goods and the price of the inventory investment nearly equals the finished goods price.
This means that the firm holds the finished goods investment so that it can face any rise in the
inventory investment price and therefore any increase in sales.
2-3 Government
The government finances its spending through government revenues（ Tt ）and by issuing
government debt. The government budget constraint can be written as
Dt  Dt 1  DEFt  Gt  rt Dt 1  Tt
(2-28)
Government revenues are defined as personal income taxes, corporation taxes and other
sources. The government debt is held by both domestic residents and foreigners.
Gt  pt GCt  pt GI t
(2-29)
Tt  TH t  TFt  TOt
(2-30)
GC
GI
where
Dt : Real government debt at the end of t
DEFt : Real budget deficit in period t
Gt : Real total government expenditure in period t
5) )
These formulations were originally developed by West (1996), who applied the Linear Quadratic
Model (LQ) to the optimal inventory investment. The details of derivation are summarized in the Appendix .
11
GCt : Real government expenditure on consumption in period t
GI t : Real government expenditure on investment in period t
pt
GC
: Government consumption deflator in period t (Deflated by the price index of production
goods)
GI
pt : Government investment deflator in period t(Deflated by the price index of production
goods)
Tt : Real total government revenue in period t
TFt : Real corporation taxes in period t
TH t : Real income taxes in period t
TOt : Other sources of government in period t
2-4 Macroeconomic budget constraint
Combing the budget constraints of households ， firms and the government, the
macroeconomic budget constraint can be derived. At first, the private sector’s budget constraint
is summarized by combining household constraint shown in Eq.(2-3) and firm’s cash-flow
identity shown in Eq.(2-13)8).




BH t  BH t 1  rt BH t 1  1   ht wt Lt  pt Ct  pt RCt  1   Ft Yt  wt Lt   p I t I t  p Z t IVt
c
h
(2-31)
Then, the government budget constraint is rewritten as follows
Dt  Dt 1  DEFt  pt GCt  pt GI t  rDt 1  Tt
(2-32)
Dt  BGFt  BGH t
(2-33)
GC
GI
where
BGFt : real government bonds held by foreigners
Equation (2-33) shows that government bonds are held by both domestic residents and
foreigners. Combining private and government sectors’ constraints, the macroeconomic budget
8)It
should be noted that the firms constraints is implicitly considered in deriving Equation.(2-31). It is specified
d s  Vs xs  xs 1   d s xs 1 . The left hand side of the equation equals cash-flow and increase of the capital by issuing
the equity. The right hand side equals the expenditure of the dividends for household.
12
constraint is obtained as follows
CAt  S t  I t  S t  I t
p
p
G
G
(2-34)
CAt  CEX t  CIN t
(2-35)
CEX t  BFH t  BFH t 1
(2-36)
CIN t  BGFt  BGFt 1
(2-37)
St  StH  StF
(2-38)
p


StH  rBH t 1  1   ht wt Lt  pt Ct
c
(2-39)
S  1   Ft wt Lt
F
t
(2-40)
I t  pt I t  pt RCt  p Z t IVt
p
I
h
(2-41)
St  Tt  r BGH t 1  BGFt 1   pt GCt
G
GC
(2-42)
I t  pt GI t
G
GI
(2-43)
where
F
St : Real corporate savings in period t
G
S t : Real government savings in period t
H
St : Real household savings in period t
p
S t : Real private savings in period t
p
I t : Real private expenditure on investment in period t
13
It
G
: Real government expenditure on investment in period t
CAt : Real net capital outflow in period t
CEX t : Real capital outflow in period t
CIN t : Real capital inflow in period t
As shown in Equation.(2-38), private saving consists of household saving and corporate
saving. Household saving is defined as the after-labor income minus consumption expenditure.
corporate saving equals after-corporate profit. Private investments are household residential
investment, firm’s equipment and inventory investment. Foreign Capital flows in through the
purchase of domestic government bonds by foreigners. On the other hand, domestic household
hold the foreign risk-free assets and then capital flow out. Therefore net capital outflow equals
net private savings plus net government savings shown in Equation.(2-34). Hence this paper has
succeeded in deriving current account identity by combining each sector’s budget constraints.
3.Data
All of the data on saving and investment are taken from the
｢Annual Report on National
Accounts 2000｣ (Economic and Social Research Institute Cabinet Office (former Economic
Planning Agency)).Total net saving is defined as the surplus of the nation on current
transactions (which correspond to current account) plus total investment minus total
consumption of fixed capital. Investment series (private equipment investment, private
residential investment, private inventory investment ) are selected from Gross Domestic Product
and Expenditure. Each gross investment series is adjusted by subtracting consumption of fixed
capital which are estimated in Toyo-keizai Shinposha. Public saving consists of general
government saving and public enterprise saving. general government saving.
As shown in section two, this paper develops an open economy model in which the
household and firm choose intertemporal optimization under a given world interest rate and full
employment input factors. Therefore, the main variables that we should calculate are the world
real interest rate, full-employment GDP, and future variables that representative agents expect.
The outlines of the calculations are summarized here.
In a world of with a perfect, integrated financial market, the world real interest rate is
determined to equate the world aggregate investment to the world aggregate national income.
Barro(1992) implemented this approach empirically by approximating the world by aggregate
for ten major countries. In this paper, however, a more simplified calculation is conducted. The
world real interest rate is defined as the GDP-weighted averages of a group of seven (G7)
14
countries’ real interest rates. The real interest rates selected here are the nominal long-tem
government rates less the expected inflation rate.
It is often pointed out that the measurement of full-employment GDP is difficult because of
the measurement error of production sectors, such as the productivity, capital, labor and
utilization rate. Kamada and Masuda(2000) developed an alternative measure of
full-employment GDP and output gap defined as the discrepancy between the actual and
potential GDP. The method of calculating the full-employment GDP in this paper is basically
same and it is shown in the Data Appendix.
Demand equations such as household consumption, residential investment, firm equipment
and inventory investment are reduced based on stochastic intertemporal optimization. The main
factor for the household decision from a long-term perspective is permanent income, that is the
expected discount income. The main factor for the firm’s decision id the marginal q, which
represents the future discount profit rate. These variables are unobservable since they include
unobservable factors such as future stream of labor income, profit rate and subjective discount
factor. Therefore, to make proxy variables, one has to know the stochastic structure underlying
the labor income, profit rate and subjective discount factor. Ogawa(1990) constructed a series of
permanent income based on the above method. Abel and Blanchard (1976) and Ogawa and
Kitasaka(1998) calculated a series of marginal q based on the univariate autoregressive
specification of underlying factors. The approach in this paper is along the same lines. Moreover,
taken into consideration of full-employment, series of permanent income and marginal q are
adjusted by the method in Honma et al (1987).
4. Estimation
Based on the theoretical framework developed in section 2, main functions are estimated with
some variables. Though estimation form is basically the same of theoretical specification,
cyclical factors are also considered. The estimation is conducted with quarterly data over the
period of 1975 to 1999.
4-1 Private savings
First, we derive the private savings estimation function. Based on the consumption function
expressed in Eq. (2-8), the private savings identity is given by
15
S p t  rt Bt  1   F Yt  TH t  TFt  1   1   
s t



 1  r B  d  V x  p h t 1   H  E   1  1   wL  
t
t
t
t
t
h
t 1
t  
hs
s


s  t  1  rs 

 


(4-1)
Assuming that income taxes and corporate taxes depend on the real full-employment GDP, the
private savings function can be specified as follows:
St  rt Bt  1   F   H   F Y *t
p

   1  s  t
h
 1   hs ws Ls
 1   1   1  rt Bt  d t  Vt xt  pt 1   h H t 1  Et  

s  t  1  rs 







(4-2)
where  H is the sensitivity of income tax for full-employment GDP and  F is the sensitivity of
corporate tax. All variables are then divided by the full-employment GDP and we estimate the
following function.
p
St
rB
  0  *t
*
Y t
Y t

   1  st
 
h
 1  rt Bt  d t  Vt xt  pt 1   h H t 1  Et  
 1   hs ws Ls  
 st  1  r s 
 

 1 
*

Y t






(4-3)
0  1   F   H   F
In our investigations of private saving, we have not mentioned about the corporate saving.
It is often said that in the neoclassical framework, firms are ultimately owned by household.
Therefore overall level of private saving is basically determined by household and we can
neglect corporate saving decision. In order to check the robustness of this assumption, a
preliminary test is conducted using time series analysis. Table.1 summaries the results of
cointegration test between the levels of household saving and corporate saving. The empirical
16
results indicate that there is a long-term stable relationship between household saving and
corporate saving and that it is probably safe to focus our attention on the household decision.
Table 1. Johansen’s cointegration test
1975:1-1999:1
Lag length
Test type
Trace test
Test statistics
1
17.014*
Maximum-Eigen
Value test
15.241*
The null hypothesis is that there is no cointegration relationship between two variable and * denotes
rejection of the at the 5% level.The lag length are selected based on the Schwarz Baysian Information
Criterion. The critical values are obtained from Osterward-Lenum(1992).
Table 2. Private savings
1975:3-1999:1
Const
0.478
(3.792)
PY1
-0.023
(-2.904)
S-2
0.495
(3.784)
-0.024
(-2.919)
-0.221
(-1.800)
S-3
0.537
(3.782)
-0.027
(-3.042)
-0.215
(-1.766)
S-1
PY2
TY
VARH R2(ad) D.W
ρ
0.792 2.574 0.752
0.775
(2.007)
0.799
2.528 0.764
0.804
2.444 0.775
Dependent variable: real private savings/real full-employment GDP
const: Constant term
PY1: Permanent income/ real full-employment GDP
PY2: Permanent income based on labor income with ARCH(1) process/ real full-employment GDP
TY:
change rate of the real GDP from previous quarter
VARH: Index of uncertainty in households
17
R2(ad): Adjusted coefficient of determination
D.W: Durbin-Watson Statistics
ρ：Estimate of auto-regressive coefficient of residual
(
): t-value
In this paper Marquardt’s Nonlinear Least Squares with AR(1) error was conducted. The
regression results are summarized in Table 2. (S-1) explain the basic case. The permanent
income exerts strong negative effects on savings even after containing the temporary income
(TY). These results indicate that the savings behavior is essentially long-term in nature.
In our stochastic model, households are subject to uninsurable labor income variability; an
increase in income uncertainty will result in greater savings due to people’s precautionary
motives so called precautionary saving. We regard such uncertainty for households as a
variance of the life-time innovation of after-tax labor income given by

2

 

  Et   st YDt  Et 1   st YDt 
 s t

st
PYt
2
(4-4)
To obtain an estimate of 
2
PYt
, we estimate the following ARCH(1) model
YDt   0  1YDt 1   t
(4-5)
 2 t   0   1 2 t 1   t
(4-6)
where  t is white noise. The transformation of Eq. (4-4) with Eqs. (4-5) and (4-6) yields
 2 PY 
t
1  1 1    2
 t 1
1   1  1 
(4-7)
Given an estimate of  1 and the value ofβ, we can estimate 
2
PYt
10)
. In Table 1,(J-3)
indicates that in Japan, the uncertainty in households (VARH) increases private savings because
of precautionary motives. The effect of permanent income based on labor income with the
ARCH(1) process is almost the same as (S-2) of Table 111) . we adopt the results of Table.1 (S-3)
1
10)
Estimate results of
11)
Other ARCH formulations, such as ARCH (2) or Generalized ARCH (GARCH), were tried to caluculate Eq. (4-
are summarized in the Appendix, Tables 1 and 2.
7). However, the estimation results were almost the same as the result of ARCH (1).
18
in order to deconstruct the current account.
4-3 Residential Investment
Housing stock is adjusted with the stock adjustment principle given by

H t  H t 1   H *t 1  H t 1

(4-8)
0   1
Here, H*t 1 is the desired housing stock level. Equation (4-7) indicates that households
adjust their actual housing stock gradually through a gap between the actual and desired levels.
Since the desired housing stock was derived in Eq. (2-9), the residential investment function is
given by Eq. (2-4), Eq. (2-9), and Eq. (4-8)

  NHWt 1  HWt 1  p c t 1t 1
RCt
 2  3 
Y *t
Y *t

   

4
Dt 1
Y *t
(4-9)
NHWt  1  r  Bt   d t  Vt  x t  p h t 1   h  H t 1
  1  st

HWt  Et  
 1   hs wLs 
1  r 

 3   1   1     0
4  h  
Table 3. Residential Investment
1975:4-1999:1
H-1
const
PY3
0.118 0.0001
(3.051) (3.357)
PY4
KH(-1)
-0.138
(-2.666)
TY
19
LOAN VARH
R2(ad) D.W ρ
0.958 1.508 0.918
H-2
0.098 0.0001
(2.708) (3.553)
H-3
0.097
(2.647)
-0.116 0.043 0.030
(-2.389) (2.174) (1.882)
0.0001 -0.115 0.043 0.031 -0.0001
(3.559) (-2.324) (2.138) (1.896) (-0.427)
0.963 1.599 0.912
0.963 1.610
0.913
Dependent variable: Real residential investment/real full-employment GDP
PY3: Permanent income /(residential cost* real full-employment GDP)
PY2: Permanent income based on the labor income with the ARCH(1) process/
(residential users cost* real full-employment GDP)
KH(-1): Real housing stock/real full-employment GDP (first lag)
TY: change rate of the real GDP from previous quarter
LOAN: The amount of new loan by commercial bank
VARH: Index of uncertainty in households
The regression results are summarized in Table 3. From the results of (H-1) and (H-2) of
Table 3, permanent income and housing stock were found to exert significant effects on
residential investment. Besides permanent income and housing stock, temporary income shocks
also exerted a strong effect. This indicates that housing stock is adjusted based on long-term and
short-term perspectives. The amount of new loan has also significant positive effects. the
uncertainty in households is not necessarily strong. Thus, we adopt the results of (H-2).
4-3 Private equipment investment
Private equipment investment is described given by Eqs. (4-10) and (4-11). Since the discount
value of the marginal adjustment costs (the second term of Eq.(2-21)) seems to be relatively
small, this term is igonored . Then Eq.(2-21) is transformed into Equation. (4-12) and it is the
so-called marginal tax-adjusted q.
It
  5   6 Qt
Kt
(4-10)
pI t
Qt  MQt  1
1   F 
(4-11)
20



 1   F
MQt  Et  
s  t  1  rs



 
  I s 2 

1 

    ws Ls  
s  t  As K s Ls
  1   
2  Ks 
  

F
 

I
Ks
 
 pt




(4-12)
6 
1

0
Table 4. Private equipment investment
1976:1-1999:1
I-1
Const
Q1
0.014
0.010
(1.920) (5.970)
Q2
TY
PLAND
I-2
-0.033
(-0.106)
I-4
0.014 0.009
(1.251) (5.322)
0.049
(2.443)
I-3
0.015 0.009
(2.074) (4.994)
0.048
(2.428)
0.0005
(2.006)
I-4
0.019 0.008
(3.271) (5.026)
0.048
(2.497)
0.0005
(2.073)
VARF
0.0005
(0.617)
-0.001
(-2.627)
R2(ad) D.W
0.965 1.566
ρ
0.970
0.952
1.799
0.994
0.967
1.402
0.978
0.969
1.423
0.968
0.971 1.492
0.960
Dependent variable: Real equipment investment/real capital stock
Q1: marginal q with constant discount factor
Q2: marginal q with time-varying discount factor
TY: change rate of the real GDP from previous quarter
PLAND: Change in land price from previous year
VARF: Index of uncertainty for firms
The regression results are summarized in Table 4. The marginal q with constant discount
factor (Q1) exerts a significant positive effect on equipment investment and this effect can not
be recognized in the case of marginal q with time-varying discount factor(Q2). Here after, only
Q1 is selected. As shown in (I-3), the temporary income shocks also has the positive effect. This
result indicates that investment decisions in Japan are not always long-term in nature. Besides
temporary income shocks, land prices also exert a strong effect on investment. Ogawa and
Kitasaka (1998) pointed out the importance of land prices for collateral in borrowing. The
results of this paper support their point. The effect of uncertainty on investment, which was
aemphasized in Matsubayashi (1995), was examined in (I-5). The stochastic process was
21
specified and conditional variance series was calculated as the index of uncertainty for firms.
Uncertainty found to exert a significantly negative effect on investment and this results are
consistent with Matsubayashi’s result(1995). Therefore, we adopt the results of (I-5).
4-4 Inventory investment
As considered in section 2, the optimal inventory investment level is generally determined
by the following two factors. One is the inventory level in the previous period. The other factor
is the inventory price change. These two factors are included to estimate a basic formulation for
the inventory investment. Results are summarized in Table 7 for Japan and Table 8 for the U.S.
Table 5. Private inventory investment
1975:2-1999:1
const
0.002
(3.373)
INV(-1)
0.663
(9.116)
DPZ(-1)
0.110
(2.954)
TY
Z-2
0.0021
(1.579)
0.581
(7.868)
0.112
(3.140)
0.068
(3.242)
Z-3
0.003
(1.291)
0.464
(7.835)
Z-1
0.028
(3.137)
0.026
(3.016)
SER
-8.29E-08
(-0.331)
R2(ad)
0.623
D.W
2.184
0.523
2.229
0.524
2.128
Dependent variable: Real private inventory investment/Real full-employment GDP
INV(-1): Real inventory investment/Real full-employment GDP (first lag)
DPZ(-1): Change of the price index for the inventory investment
TY : change rate of the real GDP from previous year
SER: Forecast error of the sale at t
The effects of lagged inventory and price change of inventory are significant. Besides
these variables, temporal income change also exerts a strong positive effect. These estimation
results indicate that the intended inventory stock is adjusted from both long-term and short-term
perspectives.
For finished goods inventories, it is important to consider any unintended inventory
caused by a shortage of goods or unsold goods. In order to contain inventories of this type, the
following approach has been employed to measure the forecast error of sales. On the
assumption of rational expectation, the forecast error of sales t  can be defined as follows:
22
t  Yt  Et Yt t 1 
(4-13)
Let’s assume that the difference of sales（ Yt ）follows a first-order autoregressive process:
n
Yt  b0   bi Yt i   t
(4-14)
i 1
 t ～N  0,  2 
Et  t 1   0
The lag length of Eq. (4-14) is determined on the basis of the Schwarz Information Criterion,
and the lag length of one is chosen. Substituting Eq. (4-14) into Eq. (4-13), it can be shown that
the forecast error is written as:
t  Yt  b0  1  b1 Yt 1  b1Yt 2
(4-15)
Equation (4-14) is estimated over the period of 1975(Q1)-1999(Q1). Taking the forecast error
into consideration, it is shown in Table 5(Z-4) that the explanatory power is low. This means
that inventory control was carried out successfully and consequently, the influence of any
unextended inventory was diminished. The results of (Z-4) was adopted.
4-5 Public net savings
Let’s assume that public investment is exogenous. Then, labor income taxes and corporate
taxes increase with any business upswing. Taking in this effect, public savings are estimated by
the real GDP and the output gap defined as the discrepancy between actual and potential GDP.
All variables exert significant effects.
Table 6. Public savings
1975:3-1999:1
G-1
Const
-8816.161
(-0.645)
GDP
0.100
(2.954)
GAP
129011.6
(2.375)
23
R2(ad) D.W ρ
0.886 2.774 0.840
Dependent variables: Real public savings
GDP: Real GDP (first lag)
GAP: output gap (discrepancy between actual and potential GDP )
5．Calculations
5-1 The framework of the neoclassical saving-investment balance approach
In this section, structural and nonstructural components of equations are deconstructed
based on estimation results. Before any deconstruction, it is necessary to understand the
framework of the neoclassical saving-investment balance approach13). Two cases of
specification can be considered.
Case (1)
As mentioned in section 1, let’s suppose that savings and investment are not influenced by the
real
exchange rate and determined by the full-employment GDP and real world interest rate.
In this case, the goods market equilibrium condition is specified as follows14) :


CA e, Y , Y * ; A1  S Y , r; A2   I Y , r; A2 
(5-1)
where CA, S and I are the current account, private savings and private investment. A1 , A2 and
A3 are exogenous disturbance parameters. The real GDP, Y , is determined by the production
technology and supply of full-employment input factors. The real world interest rate, r , is
determined by the goods market equilibrium condition for the world. Given the real GDP and
real world interest rate, the right-hand side of Eq. (5-1), the saving-investment balance is
determined and is independent of the real exchange rate. As a result, the current account is
determined in such a way that it is consistent with the saving-investment balance and the real
exchange rate is adjusted in such way that it is consistent with the level of the current account.
13)
Komiya(1994), Suda(1996), Yoshikawa(1995) are provided excellent commentaries on the framework of the
neoclassical saving-investment balance approach.
14) It assumes that the public deficit is zero.
24
As defined in the introduction, the structural current account in this paper includes the parts of
the current account explained by the intertemporal optimal behaviors of agents under an
economy of full employment. If both savings and investment are not influenced by the real
exchange rate, therefore, the structural current account can be calculated in such a way as to
equal to the structural parts of savings minus the structural parts of investment.
Case (2)
If savings and investment depend on the real exchange rate, the goods market equilibrium
condition specified in Eq. (5-1) is modified as follows:


CA e, Y , Y * ; A1  S Y , r , e; A2   I Y , r , e; A2 
(5-2)
Unlike Case (1), Eq. (5-2) simultaneously determines the real exchange rate and the current
account.
However, the effect of the real exchange rate on savings and investment is ambiguous because
of the poor theoretical foundation. As introduced in section 1, in the circumstance of an
under-full employment economy, the dependence of savings on the real exchange rate is
referred to as the Laursen-Metzler effect. After this effect was found, theoretical approaches
based on the intertemporal utility maximizing framework were developed such as Obstfeld
(1982), Svensson and Razin (1983) and Perron and Svensson (1985). The main results from
these research works are the discovery of a distinction between permanent and transitory,
anticipated and unanticipated real exchange rate shocks, and generally differing signs of effects
on savings. Moreover, the effects of the real exchange rate on investment have received very
limited attention in analytical literature excluding the work of Campa and Goldberg
(1996)(1999) Miyagawa and Takeda (1994) and Matsubayashi(2001). Therefore, it is not easy
to construct an intertemporal optimization framework of Eq. (5-2) and any calculation of the
structural current account is a bit more difficult than that of case (1).
Taken these cases into consideration, the following approach was employed in the
measurement of the structural current account in both countries. First, the effects of the real
exchange rate on savings and investment are empirically examined. Since the effects are
ambiguous in this paper because of the poor theoretical foundation. The effects of the real
exchange rate on permanent income, which is a key determinant of savings, and the effects of
the real exchange rate on marginal q, which is a key determinant of investment, are examined.
Second, the classification of the framework of the neoclassical saving-investment balance
approach is employed based on the above preliminary test. If no dependence of the savings and
investment on the real exchange rate is observed, the right-hand side of Eq. (5-1) is calculated
25
based on the estimation results of each function in section 3. If the savings and investment
depend on the real exchange rate, in contrast, it is necessary not only to calculate the right-hand
side of Eq. (5-2) but also to estimate the left-hand side of Eq. (5-2), which are an import and
export equation. Then, the equilibrium current account and real exchange rate are determined so
that both sides of Eq. (5-2) are equal.
In order to examine the above points, Granger causality test is conducted. Two types of
exchange rates are considered. One is the yen-dollar real exchange rate deflated by GDP and the
other is the real effective exchange rate. The test results shown in table 7 indicates that both
types of exchange rate do not have effect on permanent income and marginal q. In Japan, saving
and investment decision does not depend on the real exchange rate from long-term perspective.
To sum up, the goods market equilibrium condition in Japan is specified as Eq. (5-1) and it is
consistent with Komiya(1994).He harshly criticized the commonly accepted views on the
Japanese huge current account surplus since 1980. He presented neo-classical general
equilibrium model which is assumed that saving and investment are determined independently
of the real exchange rate.
Table 7. Granger Causality test
Causality
REX → PINCOME
REEX → PINCOME
REX → Mq
REEX → Mq
Lag length
2
2
2
2
P-Value
0.074
0.112
0.812
0.354
REX: yen-dollar real exchange rate deflated by GDP (first difference)
REEX: real effective exchange rate (first difference)
PINCOME: permanent income (first difference)
Mq: marginal q (level)
In order to conduct Granger causality test, it is necessary to specify VAR system. Base on the unit root test, real
exchange rate, real effective rate and permanent income are specified as the first difference form. Then two variable
VAR system is constructed. Optimal lag length is selected by Shwarz Information Criterion. P-value indicate the
provability which support the null hypothesis.
5-2 Calculation of the structural current account
In this section, structural and nonstructural components of the current account are
deconstructed based on the estimation results in section 3 and section 4. As defined in the
26
introduction, the structural current account in this paper includes the parts of the current account
explained by the intertemporal optimal behaviors of agents under an economy of full
employment. Accordingly, the structural parts of savings residential investment, equipment
investment and inventory investment are parts that are explained by the intertemporal optimal
behaviors of agents, such as permanent income, marginal q, lagged housing stock, change of
inventory price, etc. In the case of public savings, it is difficult to derive theoretically. Instead,
the structural components of public savings are calculated by substituting the full-employment
GDP into the public savings function. Structural and nonstructural parts of each function are
illustrated in Figs. 1 to 5.
Taking into consideration the empirical test in section 5-1, the goods market equilibrium
condition in Japan is specified as Equation. (5-1). Then the structural current account ( STCA )
and nonstructural current account ( NSTCA ) are determined as follows:
STCAt  STPSt  STINVFRt  STINVHRt  STINVZRt  STGSt 
I tG
Y *t
(5-5)
NSTCAt  CARt  STCAt
(5-6)
where
CAR
t : Real current account in period t(par real full-employment GDP)
I tG : Real public investment
: Non structural real current account
N S T Ct A
S T C tA: Structural current account (par real full-employment GDP)
S T P tS: Structural part of real private saving
Structural part of real equipment investment
S T I N V Ft : R
STINVH
t :RStructural part of real residential investment
STINVZ
t :RStructural part of real inventory investment
S T G tS: Structural part of real public saving
To compare with the results of preceding research, the structural and nonstructural
movements of the current account over the period of 1976(Q1) - 1992(Q4) are shown in Figs.6
to 7. In the end of 1970s, the structural current account is below the actual value. In these
periods, as shown in Figure.1, discrepancy between actual and structural saving is remarkable.
These periods correspond to the low growth period caused by first and second oil shock and
precautionary saving by household increased. On the other hand, structural movements of
equipment investment and public deficits are as same as actual movements. Taking these
movements into considerations, The structural parts of the current account in the end of 1970s
27
are governed by the private saving.
Most parts of Japan’s current account at the beginning of the 1980’s were structural. This
result is consistent with the findings of Ueda (1988), Fukao(1986) Honma et al (1987) and
Yoshikawa (1995). In these periods, structural parts of each sector, household, firm and
government, are as same as the actual values. Therefore it seems to be natural that at the
beginning of 1980s Japanese economy is under the circumstance of neoclassical economy.
In the end of 1980s so called Bubble period, the structural current account began to decrease
which was consistent with increase of structural equipment investment. This tendency was also
observed in Chigira and Takeda (1992). In 1990s, Japan has experienced long and deep
stagnation. In these periods, the nonstructural current account surplus has been remarkable
(Figure.2). Structural part of the current account began to increase since the end of 1990s which
corresponds to the declining tendency of structural part of the equipment investment. These
observations have shown that our new method based on individual optimization has been
successful to some degree in deconstructing the current account into two parts The remarkable
point is that the structural current account is basically determined by the structural movements
of corporate investment not by the private saving. This characteristic is also pointed out in
Economic Planing Agency (1984).
In the above deconstruction, it was not clarified as to what determined the movements of the
nonstructural current account. Then, the following estimations are employed to check this point.
Dependent variable is the nonstructural series of current account measured by Equations.(5-5)
and (5-6). Independent variables are domestic and foreign cyclical factors and real exchange
rate. Output gap in Japan is defined as the domestic short-term cyclical factors. Growth rate of
real GDP in OECD countries is selected as the index of economic fluctuations in the world.
Growth rate of real GDP in the U.S is also considered because Japanese economy has a close
relationship with U.S. economy. Two types of exchange rates are considered. One is the
yen-dollar real exchange rate deflated by GDP and the other is the real effective exchange rate.
As shown in Table.15-a, It seems that domestic cyclical factor and world business
fluctuations exert significant effects in the whole period. However, the serial correlation of
disturbance is remarkably strong and the t-values of coefficients are likely to overestimated.
Tables.15-b and 15-c summarize the results in 1990s. Serial correlation of the disturbance term
is improved and not only domestic cyclical factor but also have notable effects on the
nonstructural current account. On the other hand, exchange rate does not strong effects on the
nonstructural current account. Taking these results into considerations, it seems reasonable to
suppose that in 1990s, Japanese nonstructural parts of the current account were governed by the
domestic and foreign business fluctuations. Japan has experienced deep recession and U.S.
economy has enjoyed strong boom. These contrastive economic conditions in both countries
28
have remarkable effects on the Japanese current account in the 1990s.
Table 15-a. Determinants of the nonstructural current account
1976:1-199:1
Const GYJ GYOECD
-0.008 -0.117
0.001
(-1.372) (-1.927) (2.050)
-0.022 -0.135
(-2.180) (-2.219)
REX
0: 0.00013 (1.353)
1: 1.9E-05 (0.094)
2: -1.3E-05 (-0.864)
3: 2.6E-05 (0.279)
SUM: 5.2E-06 (0.186)
0.001
(1.806)
REEX
0: 0.004 (1.376)
1: -2.2E-05(-0.045)
2: -0.00026(-0.536)
3: 2.3E-05 (0.074)
SUM: 0.0001 (1.600)
R2(ad) D.W
0.130 0.280
0.147
0.308
Dependent variable: Nonstructural current account measured by Eqs. (5-5) and (5-6).
GYJ: output gap in Japan
GYOECD: growth rate of real GDP from previous quarter in 25 OECD countries (three period moving average )
GYUS: growth rate of real GDP from previous quarter in U.S. (three period moving average )
REX: yen-dollar real exchange rate deflated by GDP
REER: Real effective exchange rate
Both types of exchange rate are distributed by the Almon lag which assume three lags and third degree polynomial
with endpoint constraints.
Table 15-b. Determinants of the nonstructural current account
1990:1-199:1
29
Const GYJ GYOECD
0.002 -0.193
0.002
(0.229) (-4.258) (2.091)
-0.022 -0.218
(-1.329) (-4.211)
REX
0: 0.0001 (1.250)
1: 1.9E-05 (-0.306)
2: 0.0001 (0.552)
3: -0.0004 (-2.260)
SUM: -0.0001 (-2.214)
0.004
(3.085)
REEX
0: 0.0001 (0.534)
1: 2.0E-05 (0.045)
2: 0.00012 (0.253)
3: -0.00032 (-0.901)
SUM: -2.6E-07 (-0.001)
R2(ad) D.W
0.752 1.083
0.674 0.761
Table 15-c. Determinants of the nonstructural current account
1990:1-199:1
Const GYJ GYUS
0.007 -0.174
0.001
(0.696) (-3.499)
(2.006)
-0.014 -0.193
(-0.860) (-3.291)
REX
REEX
0:
0.0002 (1.783)
1: -0.0001 (-0.663)
2:
0.0001 (-0.871)
3:
-0.0004 (-2.823)
SUM: -0.0001 (-2.381)
0.002
(2.741)
0: 0.003 (1.154)
1: -0.0001 (-0.340)
2: 0.0002 (0.582)
3: -0.0005 (-1.479)
SUM: -2.5E-05 (-0.133)
R2(ad) D.W
0.749 1.247
0.656 0.840
6. Conclusions
This paper has empirically investigated causes of Japan’s current account surplus since 1976.
The main conclusions are summarized by the following points.
30
First, in Japan, saving and investment decision does not depend on the real exchange rate
from long-term perspective. It indicates that the structural current account can be calculated in
such a way as to equal to the structural parts of savings minus the structural parts of investment.
Second, in the end of 1970s, the structural current account is below the actual value.These
periods correspond to the low growth period caused by first and second oil shock and
precautionary saving by household increased. On the other hand, structural movements of
equipment investment and public deficits are as same as actual movements. Taking these
movements into considerations, The structural parts of the current account in the end of 1970s
are governed by the private saving. Most parts of Japan’s current account at the beginning of the
1980’s were structural. This result is consistent with former researches. In these periods,
structural parts of each sector, household, firm and government, are as same as the actual values.
Therefore it seems to be natural that at the beginning of 1980s Japanese economy is under the
circumstance of neoclassical economy. In the end of 1980s so called Bubble period, the
structural current account began to decrease which was consistent with increase of structural
equipment investment. In 1990s, Japan has experienced long and deep stagnation. In these
periods, the nonstructural current account surplus has been remarkable. Structural part of the
current account began to increase since the end of 1990s which corresponds to the declining
tendency of structural part of the equipment investment. The remarkable point is that the
structural current account is basically determined by the structural movements of corporate
investment not by the private saving.
Third, it is likely that in 1990s, Japanese nonstructural parts of the current account were
governed by the domestic and foreign business fluctuations. Japan has experienced deep
recession and U.S. economy has enjoyed strong boom. These contrastive economic conditions
in both countries have remarkable effects on the Japanese current account in the 1990s.
This is the first attempt at the deconstructing movements of the current account into
structural and cyclical components based on an individual optimization model. The results were
basically similar to those of established approach in 1980s. Therefore, this new method of
deconstruction seems to be successful. Since 1999, Japanese trade surplus has begun to decrease
sharply. It seems to be attractive that the causes of this rapid change is examined empircally
with new method developed in this paper.
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Figure.1-a Structural Parts of Private Saving
(Fraction of full-employment GDP)
1976:1-1999:1
.24
.20
.16
34
Figure.1-b Non-Structural Parts of Private Saving
(Fraction of full-employment GDP)
1976:1-1999:1
.08
.04
.00
-.04
-.08
1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998
Figure.2-a Structural Parts of Private Residential Investment
Non-structural
(Fraction of full-employment
GDP)
1976:1-1999:1
.05
.04
35
.03
.02
Figure.2-b Non-Structural Parts of Private Residential Investment
(Fraction of full-employment GDP)
1976:1-1999:1
.015
.010
.005
.000
-.005
-.010
1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998
Non-structural
Figure.3-a Structural Parts of Private Equipment Investment
(Fraction of full-employment GDP)
1976:1-1999:1
.10
.08
36
.06
.04
Figure.3-b Non-Structural Parts of Private Equipment Investment
(Fraction of full-employment GDP)
1976:1-1999:1
.04
.02
.00
-.02
-.04
1976 1978
1980 1982
1984
1986 1988
1990 1992
1994
1996 1998
Non-structural
Figure.4-a Structural Parts of Private Inventory Investment
(Fraction of full-employment GDP)
1976:1-1999:1
.03
.02
37
.01
Figure.4-b Non-Structural Parts of PrivateInventory Investment
(Fraction of full-employment GDP)
1976:1-1999:1
.015
.010
.005
.000
-.005
-.010
1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998
Non-structural
Figure.5-a Structural Parts of Public Saving
(Fraction of full-employment GDP)
1976:1-1999:1
.08
.04
.00
-.04
38
Figure.5-b Non-Structural Parts of Public Saving
(Fraction of full-employment GDP)
1976:1-1999:1
.08
.04
.00
-.04
-.08
1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998
Non-structural
Figure.6-a Structural Parts of the Current Account
(Fraction of full-employment GDP)
.06
1976:1-1999:1
.04
.02
.00
39
Figure.6-b Non-Structural Parts of the Current Account
(Fraction of full-employment GDP)
1976:1-1999:1
.03
.02
.01
.00
-.01
-.02
1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998
Data Appendix Calculation of Full -Employment GDP
Non-structural
The method of calculating full-employment ( potential) GDP in this paper is basically on the
same track of Kamada and Masuda (2000). A Cobb-Douglas production function with three
factors, capital, labor, and total factor productivity (TFP) is considered. At first, TFP is
40
calculated with actual levels of capital and labor based on the production function. Second, full
employment (potential) GDP is measured by substituting the entire amount of labor and capital
into the production function. Figure A-1 illustrates actual and potential GDP. In Figure A-4,
output gap, which is a deviation rate of actual output from potential GDP, is also shown. The
output gap measured in this paper behavior is almost as same as that of Kamada and Masuda
(2000) .
Figure A-1. Actual and Potential GDP
1975:1-1999:1
1000 million yen
600000
500000
400000
300000
200000
76
78
80
82
84
86
88
Actual GDP
90
92
94
96
98
94
96
98
Potential GDP
Figure A-2. Output gap (%)
1975:1-1999:1
-2
-4
-6
-8
-10
-12
76
78
80
82
84
86
41
88
90
92