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

July 25, 2013
Yusuke Kumano^*1
Ichiro Muto^*2
Akihiro Nakano^*3

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.

JEL Classifications
E23; E32; C32

Keywords
Industrial Production; Structural Factor Analysis; Lehman Shock; Great East Japan Earthquake; Supply Chain Network; Input-output Matrix

The authors are grateful to Kosuke Aoki, Hibiki Ichiue, Michel Juillard, Koichiro Kamada, Mitsuru Katagiri, Marco Lombardi, Eiji Maeda, Makoto Nirei, Shinichi Nishiyama, Kenichi Sakura, Junnosuke Shino, Etsuro Shioji, Tomohiro Sugo, Kozo Ueda, and the participants at 5th ESRI-CEPREMAP Joint Workshop "Applicability of DSGE Model for Policy Analysis," 2013 Japanese Economic Association Annual Spring Meeting, and the seminar at the Bank of Japan for their advice and comments. The views expressed in this paper are those of the authors and do not necessarily reflect the official views of the Bank of Japan.

*1 Research and Statistics Department (currently, Financial Markets Department)
E-mail : yuusuke.kumano@boj.or.jp
*2 Research and Statistics Department
E-mail : ichirou.mutou@boj.or.jp
*3 Research and Statistics Department
E-mail : akihiro.nakano@boj.or.jp

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