Establishment dynamics in post-war Japan: missing entry and shrinking size

We study the long-run evolution of establishment dynamism in post-war Japan and document three previously unreported trends. First, establishment entry rates declined persistently from the late 1950s to the late 1990s, while exit rates remained low and stagnant, producing a pronounced aging of Japanese business units. Second, average establishment size fell sharply during the 1960s and 1970s—most notably in manufacturing and construction—before partially recovering for younger establishments in subsequent decades. Third, the average lifecycle growth of cohorts shifted markedly downward in the same period, further dampening market dynamism. Using a standard firm dynamics model calibrated to Japan’s data, we test a range of potential drivers. We find that changes in labor supply growth account for much of the long-term decline in entry rates, albeit via a largely direct mechanism with minimal compositional feedback. Moreover, a moderate reduction in fixed operation costs or in the dispersion of ex-ante productivity helps generate the observed declines in both entrant and incumbent sizes. In contrast, altering entry costs, exit values, or labor market distortions fails to yield realistic predictions in an economy with limited ex-post heterogeneity. Our findings suggest that long-running declines in labor supply growth, falling fixed costs, and narrowing entrant heterogeneity together offer the most plausible explanation for Japan’s enduring transition toward lower market dynamism.