The Causes of Japan's Economic Slowdown and Necessary Policies: An Analysis Based on the Japan Industrial Productivity Database 2018

Using the recently completed Japan Industrial Productivity Database (JIP) 2018 and the EU KLEMS Database 2017, we compare the sources of economic growth of Japan, the U.S., Germany, France, and the U.K. for the period 1995–2015 using growth accounting. We find that the reasons why Japan's economic growth during the 2005–2015 period was much slower than that of the other major economies are the decline in the working-age population and sluggish investment in capital services. Among the five countries, Japan was the only one whose growth rate of the capital stock was lower than the natural growth rate. Moreover, comparing the composition of factor inputs in Japan and the U.S. shows that although inputs of information and communication technology (ICT) and research and development (R&D) capital services in Japan are not particularly low compared to the input of other capital goods, capital accumulation in general has been extremely small. Moreover, investment in economic competencies (worker training and organizational structure), which are thought to be complementary to ICT and R&D capital, has been much smaller than in other countries. Finally, in addition to demographic factors and sluggish capital investment, another reason for the slowdown in Japan's economic growth in 2005–2015 compared to the preceding decade was the decline in TFP growth, which was caused by a drop in productivity growth in a handful of industries, including electronic data processing machines, digital and analog computer equipment and accessories, motor vehicles (including motor vehicle bodies), electricity, and wholesale trade.