Declining Rate of Return on Capital and the Role of Intangibles in Japan

Since the collapse of the bubble economy, economic growth rates in Japan have slowed down as a result of low capital accumulation. We focus on the low rate of return on capital, which led to this slow capital accumulation. We find that the increase in the capital/output ratio and low capital share led to the low rate of return on capital. Not only has the rate of return on capital declined, but also its variance has grown and the number of industries with negative rates of return has increased. Then, we estimate a modified factor price frontier model using industry-level data. In our estimations, the profit rate is explained not only by the real wage but also by intangible investments. Estimation results show that investment in human resources leads to an increase in the profit rate. However, the complementary effects between information technology (IT) or research and development (R&D) capital and tangible capital are indefinite as suggested by Chun et al. (2015). Our study implies that the government should take a comprehensive innovation policy including improvements in human resources and organizational structure as well as IT and R&D investments to revitalize capital formation in Japan.