Structural Change and Business Cycles in Japan: Revisiting the Stylized Facts

The Japanese economy has experienced massive structural changes since the end of the 1990s, including a decline in the working-age population, a decade of deflation, an increase in the number of non-regular workers, which has almost doubled since the early 1990s, contributing to a large reduction in wage costs, and rapid advances in globalization. What are the implications of such changes for Japan’s business cycle dynamics? This study analyzes the stylized facts of Japanese business cycles under structural change. The results, based on traditional frequency domain analysis using more than 60 quarterly macroeconomic time series, provide robust findings. Among the most interesting ones is that scheduled hours worked play an increasingly important role as a buffer for labor input, suggesting that Japanese firms tend to adjust their labor input through hours worked, owing, in part, to the increasing number of non-regular workers, which allows firms to adjust labor input in a relatively flexible manner while keeping the number of employees unchanged. The increased role of hours worked is confirmed by an analysis based on a time-varying parameter structural vector autoregression (TVP-VAR) model taking the time-varying nature of the underlying structure of the economy into account. Meanwhile, in other areas such as private consumption and investment, wages, deflators and prices, and financial market indicators, the basic mechanism of business cycles appears to have remained largely unchanged, as reflected in the links between cyclical fluctuations in these series and cyclical fluctuations in output, implying that structural change may not necessarily affect the cyclical regularities in all macroeconomic time series.