Japan conference.

The high correlation between graduating from a selective college and success in the labor market has been observed in many countries. There are two major explanations for this finding: either graduating from selective colleges causes success in the labor market because of better education, a better alumni network, or something attached to selective college graduation, or the correlation is created by a "third" factor, such as selective college graduates' high innate ability, or better family background. Kawaguchi and Ma attempt to test the latter hypothesis by using a natural experiment. The most selective university in Japan, the University of Tokyo, did not admit new students in 1969 because the university could not administer its entrance examination; there was a campus lockout by armed, leftist students, who demanded university reform. Consequently, many of the 3,000 high school graduates who would have been admitted to the university went to other, second-best universities that year. The authors ask whether the 1973 graduation cohort of these secondbest universities performed better than other graduation cohorts of the same universities. Using the 2002 Who's Who for publicly traded companies and the central government, they find little evidence that the 1973 graduating cohort from the second-best universities performed better than other cohorts. This finding rejects the hypothesis that the Tokyo graduates' success is explained solely by their innate high ability.

Ono and Odaki examine differences in the wage structure of domestic versus foreign-owned establishments in Japan. Using high-quality wage datasets from the Japanese government, they construct a large employer-employee matched database consisting of 50,000 establishments matched with a sample of approximately one million workers in 1998. Their results confirm that foreign-owned establishments in Japan pay higher wages than domestic establishments, even after they account for human capital and industry composition. A single percentage point increase in the foreign ownership share of equity is associated with a 0.3 percent increase in wages. These results also highlight the distinction in the structure of wages between domestic and foreign-owned establishments. Tenure effects on wages are considerably weaker among foreign-owned establishments, where wages are determined more by general skills as observed by the higher returns to education and work experience. Women in foreign-owned establishments earn more than women in domestic establishments, resulting in a smaller gender wage gap among foreign-owned establishments. Given the high degree of gender segregation and the lack of long-term prospects for women in Japan, foreign-owned establishments may be one source of "brain-drain" for highly-skilled women in the Japanese labor market.

Based on a panel dataset of Japanese manufacturing firms in research-intensive industries, Ogawa investigates the extent to which outstanding debt in the 1990s affected firms' R and D activities. He finds that massive debt had a significantly negative effect on R and D investment in the 1990s. Also, R and D was closely linked to firm-level total factor productivity growth during that period. In fact, a 10 percentage point increase in the debt-to-asset ratio lowered the firm-level total factor productivity growth rate by 0.72 percentage points for 1999-2001.

Dewenter, Hamao, and Hess use banking theory to try to understand the loan loss provisioning and write-off behavior of Japanese banks during Japan's economic slow growth period that began in 1992. They compare Japanese city and trust banks, and Japanese banks with banks from other countries that have similar banking systems. A major and surprising finding is that Japanese city banks differ from Japanese trust banks, but not from banks in other countries with similar banking systems. The Japanese banks are neither uniform nor unique.

Montgomery and Shimizutani examine the effectiveness of bank recapitalization policies in Japan. Based on a careful reading of the "business revitalization plan" submitted by banks requesting government funds, they identify four primary goals of the capital injection plan in Japan: 1) to increase the bank capital ratios; 2) to increase lending, in particular to small and medium enterprises, and avoid a "credit crunch"; 3) to increase write-offs of non-performing loans; and 4) to encourage restructuring. Using a panel of individual bank data, the authors estimate the effectiveness of the Japanese government policy of public fund injection in achieving the first two of these stated goals. They find that capital injections are more effective for international banks than for domestic banks. For international banks, receipt of injected capital seems to relax the constraint that capitalization makes on overall loan growth. Further, the receipt of injected capital strengthens the capital position of both international and regional banks. These results are based on ordinary least squares analysis and do not hold up once the authors control for possible endogeneity using an instrumental variables approach.

In sharp contrast to its fabulous postwar growth, the Japanese economy stagnated for a long time before World War II: prewar Japanese real GNP per worker remained at about 40 percent of that of the leader country, the United States, at least after 1885, with no capital deepening. Hayashi and Prescott identify as the main cause of the prewar stagnation a barrier that forced the number of persons employed in agriculture to be constant at about 14 million throughout the prewar period. A two-sector growth model shows that the barrier-induced sectoral misallocation of labor explains a virtual lack of capital deepening and the depressed output level. Were it not for the barrier, the model predicts that Japan's prewar GNP per worker would have been about 50 to 60 percent of the U.S. level, roughly where prewar Western Europe was. This higher output level comes about because an efficient use of labor otherwise locked up in agriculture raises the economy's overall production efficiency and sparks a rapid capital deepening.

Leigh investigates how monetary policy can help to avoid the liquidity trap. He first analyzes how the Bank of Japan conducted interest rate policy over the 1990s as the economy entered a deflationary slump. The Bank's implicit inflation target declined to about 1 percent in the 1990s from about 2.5 percent in the 1980s, he estimates. It seems that the problem arose because of a series of adverse shocks and not because of an extraordinary monetary policy mistake. Next, Leigh investigates whether an alternative monetary policy rule could have avoided the liquidity trap despite these shocks. He finds that targeting a higher rate of inflation of 2-3 percent would not have provided much protection against hitting the zero bound on nominal interest rates. Similarly, a policy of responding more aggressively to the inflation gap while keeping the low inflation target would have provided little improvement in economic performance. The economy still enters the trap under a nonlinear policy rule that commits the central bank to keeping interest rates at zero even after the economy begins to recover. However, Leigh finds that a rule that combined both a higher inflation target, of about 3 percent, and a more aggressive response to the inflation gap would have improved the economy's performance and avoided the zero bound.

The underlying causes of sharp declines in bank lending during recessions in large developed economies, as exemplified by the United States in the early 1990s and Japan in the late 1990s, are still being debated because of a lack of any convincing identification strategy of the supply side capital-lending relationship with lending demand. Watanabe attempts to construct a strong instrument for bank capital from empirical observation of the banks' behavioral changes in the past, and to estimate the impact of capital adequacy on the lending supply. He discusses the implications of prudential regulation and the ineffectiveness of a loose monetary policy based on the micro evidence presented.

Japan Conference

The NBER together with the Centre for Economic Policy Research, Center for International Research on the Japanese Economy, and European Institute of Japanese Studies jointly organized a conference on the Japanese economy in Tokyo on September 1-2. The co-chairs of the meeting were: Magnus Blomstrom, NBER and Stockholm School of Economics; Jennifer Corbett, Australian National Union; Fumio Hayashi, NBER and the University of Tokyo; Charles Horioka, Osaka University; Anil K Kashyap, NBER and the Graduate School of Business, University of Chicago; and David Weinstein, NBER and Columbia University. The following papers were discussed:

Daiji Kawaguchi, University of Tsukuba, and Wenjie Ma, Osaka University, "The Causal Effect of Graduating from a Top University on Promotion: Evidence from the University of Tokyo's Admission Freeze in 1969" Discussant: Edward Miguel, NBER and University of California, Berkeley 

Hiroshi Ono, Stockholm School of Economics, and Kazuhiko Odaki, Ministry of Economy, Trade and Industry , "Foreign Ownership and the Structure of Wages in Japan" Discussant: Marianne Bertrand, NBER and University, of Chicago

Kazuo Ogawa, Osaka University, "Debt, R and D Investment, and Technological Progress: A Panel Study of Japanese Manufacturing Firms in the 1990s" Discussant: Lee G. Branstetter, NBER and Columbia University

Kathryn L. Dewenter and Alan C. Hess, University of Washington, and Yasushi Hamao, University of Southern California, "Are the Major Japanese Banks Uniform or Unique?" Discussant: Joe Peek, University of Kentucky 

Heather Montgomery, Asian Development Bank Institute, and Satoshi Shimizutani, Cabinet Office, "The Effectiveness of Bank Recapitalization in Japan" Discussant: Randall S. Kroszner, NBER and University of Chicago

Fumio Hayashi, and Edward C. Prescott, Federal Reserve Bank of Minneapolis, "The Depressing Effect of Agriculture Institutions on the Prewar Japanese Economy" Discussant: John Fernald, Federal Reserve Bank of Chicago 

Daniel Leigh, Johns Hopkins University, "Monetary Policy and the Dangers of Deflation: Lessons from Japan" Discussant: Alan J. Auerbach, NBER and University of California, Berkeley

Wako Watanabe, Osaka University, "Prudential Regulation, the 'Credit Crunch' and the Ineffectiveness of Monetary Policy: Evidence from Japan" Discussant: Takeo Hoshi, NBER and University of California, San Diego