A test of the credibility of temporary protection: evidence from the Japanese oil industry

Abstract

The purpose of this paper is to examine whether the temporary protection policy for the Japanese oil industry provided by the Provisional Law on Importation of Specific Petroleum Products (Tokusekiho) between 1986 and 1996 was a credible policy. This policy plays a role as an incentive device forcing competition, but whether it functions effectively depends on whether the oil industry regarded the ‘Temporariness’ of the policy as being credible. The effectiveness of the law is analysed by measuring changes in the cost structure of four oil firms in the oil industry before, during and after the period of protection. It is found that the cost function of each firm shifted upwards during the period of protection, suggesting that the incentives did not work effectively. This implies that the temporary protection policy lacked credibility.