The Rise of China and the Japanese Economy: Evidence from Macro and Firm-level Micro Data

After prolonged recessions, the Japanese economy finally recovered in the first half of the 2000s, and recorded sustained growth until summer 2007. The purpose of this paper is to examine, from both macro and micro perspectives, the role of international trade with China in the recovery of Japanese firms in the 2000s. Using aggregated data, VAR suggests that the increased exports to China had a strong positive impact on Japanese manufacturing production but had an insignificant impact on small firms and non-manufacturing production during the last decade. It also shows that the increased imports from China had no significant impact on Japanese production. However, using firm-level data, we find that various connections with China improved the performance of small and medium size manufacturing firms and those in wholesale and retail industries. At the micro level, imports from China improved growth of sales in manufacturing firms and both profits and growth of sales in wholesale and retail firms in the early 2000s. Exports to China, which had no significant impact in the early 2000s, came to improve both profits and growth of sales of Japanese firms after the mid 2000s. However, not all connections with China had beneficial impacts on the small and medium size firms. The micro findings suggest that the increased dependence on China had highly heterogeneous impacts on Japanese firms in the 2000s.