Productivity and business cycles in Japan: Evidence from Japanese industry data

Constructing a database of 37 industries, we examine whether the measured productivity in Japan is pro-cyclical and investigate the sources of this pro-cyclicality by using the production function approach employed by Hall (1990) and Basu and Fernald (1995). The aggregate Solow residual displays pro-cyclicality. A large number of industries show constant returns to scale. No significant evidence for the presence of thick-market externalities is found. Our results also hold when we consider labour hoarding, part-time employment, and the adjustment cost of investment. The results indicate that policies to revitalize the Japanese economy should concentrate on promoting productivity growth.