Current Institutional Affiliation
Professor, Graduate School of Economics, Hitotsubashi University

Award Information

Abe Fellowship 2010
Institutional Affiliation (at time of award):
Professor, Economics, Hitotsubashi University
The Global Trade and Output Collapse of the 2008-2009 Period: Cross Country Comparison Based on Japanese Experiences

The “Lehman shock” in September 2008 led to what is now called the “great trade collapse”. Economists are starting to investigate how much of the massive decline in world trade between the fall of 2008 and the spring of 2009 can be explained by natural economic forces and how much needs to be explained by policy changes such as installation of more effective trade barriers. A related and equally important question is why some countries performed worse than others during the crisis period. My study aims first at understanding the mechanism behind a severe experience of the Japanese economy during the crisis and second at investigating its relevance in understanding cross country differences in economic performances during this period. I will focus on the roles of inventory control by firms. Why put an emphasis on the Japanese experience? Japanese exports and production fell at a scale much larger than in the US and elsewhere in the world, despite that the shock originated from the US and that the Japanese financial system remained relatively stable. By examining this extreme case carefully, it is expected that we can draw lessons that are important for the rest of the world. My analysis on Japan will focus on the role of rapid inventory disinvestments during the crisis. I will argue that the severity of Japanese output reduction can be explained, to a large extent, by the Japanese firms’ particularly strong desires to control their inventory levels, which led them to employ unusual (at least to those firms) means of adjusting production, such as shutting down an entire plant for a few days. This “structural change in firms’ behavior” viewpoint is new to the literature. I will argue that none of the existing hypotheses proposed in the growing literature on “great trade collapse”, such as trade credit crunch, goods composition of trade, and breakdown of vertical supply chain, is sufficient to explain the peculiar pattern exhibited by Japanese export and output. I will build a macroeconomic model that can support the above idea, to show that the viewpoint is indeed quantitatively relevant. The second step is to show that the lessons from the Japanese experience are indeed useful for other countries as well. For that purpose, I will utilize country-by-country data from industrialized economies as well as data at the sectoral level for the US and Japan. I will first use time series data to measure responsiveness of inventory investment to demand fluctuations for each country or sector. I will then study how differing performances in output and exports are related to various factors including my measure of sensitivity of inventory investment. It is expected that those economic forces, taken together, can explain much of the declines in output and exports in each country, and therefore it will be possible to conclude that trade barriers were not such an important factor in the “great trade collapse”.