A CGE Analysis of the Potential Impact of Information Technology on the Japanese Economy

In this paper we investigate the potential system-wide impact of information technology on the Japanese economy using a static computable general equilibrium model with base case calibrated for the year 1995. The information technology has two potential impacts: (1) it enhances the labour productivity, and (2) e-commerce improves the efficiency of marketing and reduces the cost of marketing, typically referred as "marketing margins" in the literature. There is a growing interest among policy makers in the impact of information technology on Japanese economy. The effect of e-commerce on the economy is through reduction in cost of B-to-B and B-to-C transactions. An existing estimate of the reduction in price due to the penetration of e-commerce in different sectors in Japan indicates that there is a possibility of price reduction between 1.39 percent in the automobile sector to 0.65 percent in the machine equipment sector and so on. Our model simulates the penetration of e-commerce in the Japanese economy, which will reduce market margins through direct selling on the Internet or the like. The results overall indicate that e-commerce has positive welfare benefits for consumers and that it also leads to structural changes in the economy. On top of this we impose IT-led, Harrod-type labour productivity gains and the results indicate that the Japanese economy would have large welfare gains through the penetration of IT into various sectors of the economy.