Using industry-level data of the Japan Industrial Productivity Database (JIP Database) and firm-level data of the Ministry of Economy, Trade and Industry's Basic Survey of Enterprises, we investigate the causes of the recent slowdown in Japan's total factor productivity (TFP) growth. We show that as Japan moved from the 1980s to the 1990s, there was a substantial change in the pattern of sectoral TFP growth: while TFP growth decelerated in many manufacturing industries, it picked up in non-manufacturing industries. In the 1990s, substantial deregulation measures were implemented in non-manufacturing sectors especially in communication, wholesale and retail trade, and finance, insurance and real estate, and it seems that these policies have contributed to the acceleration in TFP growth in these industries.
Regarding the poor performance of the manufacturing sector in the 1990s, our decomposition analysis based on firm-level data finds that the following three factors seem to have contributed to the low level of TFP growth. First, new entry was very limited. Second, the exit effect was negative, that is, the average TFP level of exiting firms was higher than that of remaining firms. And third, the reallocation effect on resources was small.
By estimating a firm-level cost function, we also decompose the change in each firm's TFP growth into the following three factors: scale economy effects, effects of changes in capacity utilization, and technological progress. This analysis suggests that technological progress has slowed down in many manufacturing industries in the 1990s.
