Potential Growth Of The Japanese And U.S. Economies In The Information Age

Japan's development of information technology (IT) is said to have lagged behind the U.S. throughout the "lost decade", as the 1990s are often described. However, if we harmonize the national accounts for the two countries, the contribution of IT to economic growth turns out to be nearly identical. In addition, acceleration of TFP growth rate can be found for the Japanese economy in 1990s, as the rate of advancement of IT becomes faster after the middle of 1990s. However, the economic growth rate of Japan in 1990s is substantially lower than that of the U.S. This difference comes from labor inputs and non IT capital input contribution to the economic growth. Particularly, labor input made negative contribution in Japan, while US economic growth can be achieved with a sound labor input increase. This growth accounting framework allows us to project potential economic growth for both countries. Our estimate shows that potential growth rate of Japanese economy from 2002 to 2012 is 2.12% by pessimistic case, 2.38% by base case and 2.63% by optimistic case. The same projections for the U.S. are 2.12%, 2.74% and 3.48% by pessimistic, base and optimistic case, respectively. The fact that Japanese potential growth is lower than that of U.S. comes from demographic changes in Japan toward aged society. The departure from the labor force of the mid-50s baby boomers is one of the primary sources of the projected fall in Japanese labor force over the next decade. In the longer run, the declining birth rate is the big issue. Thus, in slowing the contraction of labor supply, it is necessary to address the conflict between women's participation in the labor force and measure to prevent a declining birthrate.