Structural Change and Business Cycle Fluctuations 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, along with 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 a rapid advance in globalization. What are the implications of such changes for the understanding of Japan’s business cycle dynamics? This paper analyses the stylized facts of Japanese business cycle fluctuations under structural change. The empirical evidence, based on traditional frequency domain analysis using more than 60 quarterly macroeconomic time series, provides robust facts. Among the most interesting findings is that the role of scheduled hours worked as a buffer for labor input has become increasingly important, 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 nature of business cycle fluctuations has remained broadly unchanged, implying that structural change does not necessarily affect the cyclical regularities in all macroeconomic time series.