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What causes business cycles? Analysis of the Japanese industrial production data

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  • Iyetomi, Hiroshi
  • Nakayama, Yasuhiro
  • Yoshikawa, Hiroshi
  • Aoyama, Hideaki
  • Fujiwara, Yoshi
  • Ikeda, Yuichi
  • Souma, Wataru

Abstract

We explore what causes business cycles by analyzing the Japanese industrial production data. The methods used are spectral analysis and factor analysis. Using the random matrix theory, we show that two largest eigenvalues are significant. Taking advantage of the information revealed by disaggregated data, we identify the first dominant factor as the aggregate demand, and the second factor as inventory adjustment. They cannot be reasonably interpreted as technological shocks. We also demonstrate that in terms of two dominant factors, shipments lead production by four months. Furthermore, out-of-sample test demonstrates that the model holds up even under the 2008-2009 recession. Because a fall of output during 2008-2009 was caused by an exogenous drop in exports, it provides another justification for identifying the first dominant factor as the aggregate demand. All the findings suggest that the major cause of business cycles is real demand shocks.

Suggested Citation

  • Iyetomi, Hiroshi & Nakayama, Yasuhiro & Yoshikawa, Hiroshi & Aoyama, Hideaki & Fujiwara, Yoshi & Ikeda, Yuichi & Souma, Wataru, 2011. "What causes business cycles? Analysis of the Japanese industrial production data," Journal of the Japanese and International Economies, Elsevier, vol. 25(3), pages 246-272, September.
  • Handle: RePEc:eee:jjieco:v:25:y:2011:i:3:p:246-272
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    1. IKEDA Yuichi & AOYAMA Hideaki & YOSHIKAWA Hiroshi, 2013. "Synchronization and the Coupled Oscillator Model in International Business Cycles," Discussion papers 13089, Research Institute of Economy, Trade and Industry (RIETI).
    2. IKEDA Yuichi & AOYAMA Hideaki & IYETOMI Hiroshi & MIZUNO Takayuki & OHNISHI Takaaki & SAKAMOTO Yohei & WATANABE Tsutomu, 2016. "Econophysics Point of View of Trade Liberalization: Community dynamics, synchronization, and controllability as example of collective motions," Discussion papers 16026, Research Institute of Economy, Trade and Industry (RIETI).
    3. Mattia Guerini & Fabio Vanni & Mauro Napoletano, 2022. "E pluribus, quaedam. Gross domestic product out of a dashboard of indicators," Working Papers 2022.15, Fondazione Eni Enrico Mattei.
    4. Ledenyov, Dimitri O. & Ledenyov, Viktor O., 2015. "Wave function method to forecast foreign currencies exchange rates at ultra high frequency electronic trading in foreign currencies exchange markets," MPRA Paper 67470, University Library of Munich, Germany.
    5. Kumano, Yusuke & Muto, Ichiro & Nakano, Akihiro, 2014. "What explains the recent fluctuations in Japan’s output? A structural factor analysis of Japan’s industrial production," Journal of the Japanese and International Economies, Elsevier, vol. 34(C), pages 135-153.
    6. Yuichi Kichikawa & Hiroshi Iyetomi & Hideaki Aoyama & Yoshi Fujiwara & Hiroshi Yoshikawa, 2020. "Interindustry linkages of prices—Analysis of Japan’s deflation," PLOS ONE, Public Library of Science, vol. 15(2), pages 1-26, February.
    7. KICHIKAWA Yuichi & IYETOMI Hiroshi & AOYAMA Hideaki & YOSHIKAWA Hiroshi, 2018. "Empirical Evidence for Collective Motion of Prices with Macroeconomic Indicators in Japan," Discussion papers 18007, Research Institute of Economy, Trade and Industry (RIETI).
    8. YOSHIKAWA Hiroshi & AOYAMA Hideaki & IYETOMI Hiroshi & FUJIWARA Yoshi, 2015. "Deflation/Inflation Dynamics: Analysis based on micro prices," Discussion papers 15026, Research Institute of Economy, Trade and Industry (RIETI).
    9. Hiroshi Yoshikawa, 2015. "Stochastic macro-equilibrium: a microfoundation for the Keynesian economics," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 10(1), pages 31-55, April.
    10. Satoshi Urasawa, 2018. "Structural Change and Business Cycles in Japan: Revisiting the Stylized Facts," Journal of Business Cycle Research, Springer;Centre for International Research on Economic Tendency Surveys (CIRET), vol. 14(2), pages 243-281, November.
    11. Hiroshi Yoshikawa & Hideaki Aoyama & Yoshi Fujiwara & Hiroshi Iyetomi, 2015. "Deflation/Inflation Dynamics: Analysis based on Micro Prices ," CIRJE F-Series CIRJE-F-959, CIRJE, Faculty of Economics, University of Tokyo.
    12. Duc Thi Luu, 2022. "Portfolio Correlations in the Bank-Firm Credit Market of Japan," Computational Economics, Springer;Society for Computational Economics, vol. 60(2), pages 529-569, August.
    13. KICHIKAWA Yuichi & AOYAMA Hideaki & FUJIWARA Yoshi & IYETOMI Hiroshi & YOSHIKAWA Hiroshi, 2018. "Analysis of Inflation/Deflation: Clusters of micro prices matter!," Discussion papers 18055, Research Institute of Economy, Trade and Industry (RIETI).
    14. Irena Vodenska & Hideaki Aoyama & Yoshi Fujiwara & Hiroshi Iyetomi & Yuta Arai, 2016. "Interdependencies and Causalities in Coupled Financial Networks," PLOS ONE, Public Library of Science, vol. 11(3), pages 1-32, March.

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