Revisiting Baumol’s growth disease in Japan

Abstract

This study analyzes the cause of secular stagnation in Japan after the economic bubble and its association with industrial structural change, specifically Baumol’s growth disease (BGD). Our analysis updates Nishi and focuses on the period between 1995 and 2018 using the latest version of the JIP (Japan Industrial Productivity) database. Then, we ask “Is Japan suffering from BGD?” Our approach includes decomposition of the aggregate labor productivity growth rate, fixed-share growth rate (FSGR) measurement, and a transition probability matrix. The decomposition reveals that the within-sector effect (WSE) is the main source of aggregate labor productivity. The reallocation growth effect (RGE), which measures BGD, was negative for both the short- and long-run averages of the post-1995 period. This period is different from the previous one, as the WSE declined significantly, and the considerable decline in the WSE can be seen as a major factor in Japan’s stagnation over the past 30 years. During this stagnation, BGD silently undermined the Japanese economy, albeit as a secondary effect. Furthermore, our FSGR and transition probability matrix show that persists and is infectious in Japan. Sectors that undergo BGD tend to persist in this state, and even when one sector is in a non-BGD state, it is more likely to develop BGD.