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A Historical Evaluation of Financial Accelerator Effects in Japan's Economy *1

June 2005
Hitoshi Fuchi*2
Ichiro Muto*3
Hiroshi Ugai*4

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  • *1 This paper is a detailed version of the analysis that was reported in Section II E and Appendix 1 of Baba, Nishioka, Oda, Shirakawa, Ueda, and Ugai [2005]. We would like to express our gratitude to Hitoshi Mio (The Bank of Japan (BOJ)) for excellent research assistance in carrying out the VAR analysis, and to Ichiro Fukunaga (BOJ) for helpful comments. We would also like to thank Masaaki Shirakawa (BOJ) and Kazuo Ueda (University of Tokyo, formerly, Member of the Policy Board of BOJ) for their encouragement and fruitful advice, as well as other colleagues at the BOJ. Of course, any remaining errors should be solely attributed to the authors. The views expressed herein are those of authors and do not reflect those of BOJ or the Monetary Affairs Department.
  • *2 Monetary Affairs Department, Bank of Japan.
    E-mail: hitoshi.fuchi@boj.or.jp
  • *3 Monetary Affairs Department, Bank of Japan.
    E-mail: ichirou.mutou@boj.or.jp
  • *4 Monetary Affairs Department, Bank of Japan.
    E-mail: hiroshi.ugai@boj.or.jp

Abstract

In this paper, we carry out a historical evaluation of the financial accelerator effects, which were mainly generated by the changes in asset prices, operating on Japan's economy since the 1980s. For this purpose, we estimate a Japanese financial accelerator model, which is a modified version of Bernanke, Gertler and Gilchrist [1999]'s model, and identify the historical exogenous shocks affecting the evolution of firms' net worth. As a result, we confirm that the estimated parameter on the corporate balance sheet channel is statistically significant. We also find that the identified net worth shocks, which change the amount of firms' debt holdings relative to their total values, produced a large and persistent impact on Japan's output and prices. This result strongly suggests that the negative financial accelerator effects were indispensable to explain the mechanism behind Japan's long stagnation during the 1990s and early 2000s, as well as indicating that the deflation of general prices since the late 1990s has been at least partly attributed to the same cause.

JEL Classification:
E30, E44