Column: "Transforming Productivity in Japan: From Stagnant In-House Productivity to Market-Led Resource Reallocation"

This column examines the background to Japan's productivity stagnation using microdata and argues that productivity dynamics shifted from "within-firm growth" to "market-driven resource reallocation" from the late 1990s through the 2010s. In particular, it shows that while internal investment by large companies slowed, resource reallocation became a new driver of aggregate productivity growth.

The column emphasizes that it uses a large-scale panel based on corporate financial data provided by Teikoku Databank covering 1999 through 2020, encompassing more than 230,000 companies, including small and medium-sized enterprises across both manufacturing and non-manufacturing industries. This is said to make it possible to track companies across their entire life cycle, from entry to exit.

The analysis shows that aggregate productivity growth in the 2000s was explained almost entirely by within-firm effects, while in the 2010s resource reallocation effects became the main driver. It also finds that TFP growth at small and medium-sized enterprises exceeded that at large companies.

An analysis of the negative exit effect found that the TFP of highly productive firms that exited through mergers was higher than that of continuing firms, and suggests that mergers accounted for approximately half of the overall negative exit effect. This is prompting a reassessment of the role of creative destruction in the market.

As a policy implication, the column argues that the government should prioritize maintaining a fair competitive environment that does not impede market-driven resource reallocation, citing deregulation of M&A and improvements in corporate governance among the possible measures. It says the time has come to embrace a new dynamism in the economy.