Energy Efficiency Improvement and Technical Changes in Japanese Industries, 1955-2012

The purpose of this paper is to analyze the sources of energy efficiency improvement in Japanese industries over the period 1955-2012, based on the new estimates of substitutions of KLEM (capital, labor, energy, and materials) inputs and the biases of technical changes. The first advantage of our analysis is that we apply the framework of econometric modeling developed in Jin and Jorgenson (2010), which provides a more flexible treatment of technology as an unobservable or latent variable. The second advantage is that we develop industry-level data of the quality-adjusted outputs and KLEM inputs for 35 non-government industries in Japan, maintaining as much consistency as possible with the Japanese System of National Accounts. Our industry data indicate that energy efficiencies in most Japanese industries worsened before the oil embargo in 1973, reflecting the stabilization of oil prices relative to the increasing prices of capital and labor. The period from the mid-1970s to the mid-1980s was the golden age, in which energy efficiencies improved considerably mainly due to the substitution effects caused by the rapid increases in energy prices. The opportunities to involve the energy-saving technical change diminished until the late 1990s, and the bias of technology changed to energy-using in the 2000s in most industries. This indicates that it will be much harder for Japanese industries to improve their energy efficiencies in the future, compared to the past experiences during the golden age, not only from higher costs for substitutions from energy to other inputs, but also from our projected bias of technical changes for energy until 2030.