The Japanese economy has stagnated since the economic bubble collapsed in 1990. The paper points out two reasons for the long-term stagnation of the Japanese economy: the slow growth in capital accumulation including ICT assets and the decline of entrepreneurship. In the advanced countries, intangible assets play a crucial role in the growth at the aggregate and firm levels. To revitalize the Japanese economy, we need policies which promote accumulation in intangible assets.bubble, non-performing loans, ICT investment, MFP, intangible investment

Tsutomu Miyagawa

English

Research Papers in Economics

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Research Unit for Statistical
and Empirical Analysis in Social Sciences (Hi-Stat)
Hi-Stat
Institute of Economic Research
Hitotsubashi University
2-1 Naka, Kunitatchi Tokyo, 186-8601 Japan
http://gcoe.ier.hit-u.ac.jp
Global COE Hi-Stat Discussion Paper Series
Research Unit for Statistical
and Empirical Analysis in Social Sciences (Hi-Stat)
January 2011
Economic Slowdown in Japan and 
the Role of Intangible Assets on 
the Revitalization of the Japanese Economy
Tsutomu Miyagawa
162 
 
 
Economic Slowdown in Japan and the Role of Intangible 
Assets on the Revitalization of the Japanese Economy* 
 
   
 
 
Tsutomu Miyagawa 
(Gakushuin University, RIETI Faculty Fellow, and Samsung Economic 
Research Institute International Faculty Fellow) 
 
 
 
 
 
 
 
 
 
 
* This paper was prepared for the 12
th Portoroz Business Conference held on November 19 and 
Hitotsubashi Policy Forum held on December 15, 2010. The author thanks Professors Prasnikar 
(University of Ljubuljana), Fukao (Hitotsubashi University), Kawaguchi (Hitotsubashi 
University), Kitamura (Hitotsubashi University), Tajika (Hitotsubashi University) and 
participants of both conferences for valuable comments. This study is supported in part by a 
Grant-in-Aid for Scientific Research from Ministry of Education, Culture, Sports, Science and 
Technology (No. 22223004). The views expressed in this paper are those of the author and 
should not be attributed to any organization. 
Abstract 
 
  The Japanese economy has stagnated since the economic bubble collapsed in 1990. The 
paper points out two reasons for the long-term stagnation of the Japanese economy: the slow 
growth in capital accumulation including ICT assets and the decline of entrepreneurship. In the 
advanced countries, intangible assets play a crucial role in the growth at the aggregate and firm 
levels. To revitalize the Japanese economy, we need policies which promote accumulation in 
intangible assets. 
 
Keywords: bubble, non-performing loans, ICT investment, MFP, intangible investment 
JEL Classification numbers: E01, E22, O47, O50 1. The Japanese Economy after the Collapse of the Bubble Economy 
The Japanese economy has continued growing at a rate of 1% since the collapse 
of the bubble economy in 1990. This growth rate is one of the lowest in the advanced 
economies that enjoyed prosperity in the 1990s and the early 2000s. The Japanese 
economy in the late 1980s was similar to the US economy before the Leaman Shock. 
Stock and land prices surged. The Nikkei-225 Stock Average Price at the end of 1989 
was almost four times as high as the level of 1985. However, the Nikkei-225 fell 
sharply after 1990. In two years after the collapse of the bubble, the stock values almost 
halved (Table 1 and Figure 1). 
 
Table 1 GDP Growth Rate in China, EU, Japan, Korea, and the US
(%)
China EU 15 Japan  Korea the US
1980-90 9.3 2.4 4.6 9.7 3.2
1990-2000 10.4 2.3 1.2 6.5 3.4
2000-09 10.2* 2.0* 0.5 3.9 1.5
(Source) SNA in Japan, Korea and the US and APO Asia Productivity Databook 2010
(Note) * shows that the average growth rate is calculated in the period 2000-07.  
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yen Figure 1 The Movement in Nikkei 225
 
(Source) Nikkei Inc. 
Due to the collapse of the bubble, the banking sector ended up with vast amounts 
of non-performing loans. The Japanese government concealed the amount of 
non-performing loans and tried to lower them through fiscal stimuli in the first half of 
the 1990s. However, as these fiscal stimuli did not work to raise the growth rate to the 
level prior to the collapse of the bubble economy, the non-performing loans continued 
to accumulate. As a result, in 1997, the financial crisis occurred. The fourth largest 
securities company in Japan and a few large banks went bankrupt. 
The financial crisis induced more serious economic stagnation than before. Due 
to harsh restructuring, the unemployment rate rose to 5%. The Japanese economy 
suffered from the vicious cycle whereby the depression led to deflation that expanded the amount of non-performing loans and thus aggravated the depression. The total 
values of non-performing loans reached about 45 trillion Japanese Yen (346 billion 
Euros), which is about 9% of GDP (Figure 2). 
   
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10
15
20
25
30
35
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45
50
1998 1999 2000 2001 2002 2003 2004 2005
trillion s of yen
Figure 2 Total Values in Non-Performing 
Loans in Japan
Default Loans
Type 2 at Risk Loans
Type 1 at Risk Loans
 
    (Source) Financial Service Agency, the Government of Japan 
 
This huge amount of non-performing loans shrank due to the economic recovery 
from 2002 that was supported by the good economic performance in the US and the 
high economic growth of China. As this recovery depended on exports to these 
countries, the structural reform in Japan did not actually improve and productivity 
growth measured by multifactor productivity remained low. As exports from Japan fell rapidly after the Leaman Shock, the Japanese economy suffered from a serious 
recession again. The recovery from the Leaman Shock has been slow and the economy 
has not yet reached the peak of the previous economic recovery. Although the Japanese 
government is afraid of a second dip, it is not able to implement effective fiscal and 
monetary policies due to the huge amount of national debts and zero bound interest rate. 
2. The Structural Problems in the Japanese Economy 
There are several factors explaining the reasons for the economic stagnation in 
Japan. Some economists have argued that the main factors behind the stagnation are the 
inadequate and inappropriate monetary policies conducted by the Bank of Japan (BOJ). 
They have emphasized that the BOJ should have implemented an inflation target policy 
to get out from the deflationary state. Other economists have pointed out that the 
Japanese government should conduct structural reform to improve productivity. In this 
paper, I focus on the latter argument. 
One of the main engines in Japanese economic growth was capital formation in 
tangible assets. However, the recent trend of the domestic capital formation in the 
private sector in Japan is showing a decline. As shown in Figure 3, the current ratio of 
domestic investment to GDP is only 13%, although its average in the 80s and 90s was 
16%. The current amount of private capital formation corresponds to the total depreciation of capital stock. This implies that the current capital formation in Japan is 
carried out for replacement only, and there is no additional capital accumulation in 
Japan. 
 
10.0
12.0
14.0
16.0
18.0
20.0
22.0
%
Figure 3 The Movement in the ratio of private 
capital formation to GDP
 
(Source) Cabinet Office, the Government of Japan 
 
There are two reasons for this declining trend in domestic capital formation in 
the private sector. One is that firms and entrepreneurs are reluctant to take risks because 
many firms went bankrupt after the financial crisis. Therefore, the entry rate of new 
firms in Japan is very low compared to other advanced economies. In Global 
Entrepreneurship Monitor in 2009, the early-stage entrepreneurial activity in Japan was 
the lowest among innovation-driven economies (Figure 4). Financial institutions in Japan are also reluctant to provide funds to firms and new entrepreneurs in order to 
avoid the risk of holding non-performing loans. 
 
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Figure 4 Early-stage Entrepreneurial Activity Rate in 
Innovation-driven Economies
 
(Source) Global Entrepreneurship Monitor in 2009 
 
The other reason is the decline of the Japanese population. Firms expect the 
domestic demand to shrink due to the decline of the Japanese population. Therefore, 
manufacturing firms prefer foreign direct investment to domestic investment because 
the markets in the other Asian countries are growing. The firms in the service industry 
that depend on the domestic market and hold over 70% of the total employment tend to 
keep their capacity. In this environment, the accumulation in ICT assets in Japan – that leads to 
technological progress and new business – has been slow. After 1995 when the ICT 
revolution has been generating new business, the ICT investment in Japan fell behind 
Korea, the UK, and the US. In particular, the contribution of ICT assets to economic 
growth is low in the Japanese service sector (Figure 5). 
 
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Figure 5 ICT Investment/GDP ratio in the Major Developed Countries
Japan
Korea
US
UK
Germany
Italy
 
(Source) EUKLEMS Database 2009 
 
3. The Role of Intangible Assets on Firm and Economic Growth   
The accumulation in ICT assets is not a sufficient factor for firm and aggregate 
economic growth in the information age. As shown in Figure 6, productivity growth is not necessarily correlated with the accumulation of ICT assets. Although the growth 
rate in ICT assets is high in the UK and US, a productivity gap exists between the UK 
and the US.   
 
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Japan France Germany Korea Italy UK US
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(Source) EUKLEMS Database 2008
Figure 6 MFP Growth and the Growth of ICT Capital Service Input (1995-2005)
MFP growth 
Growth rate of ICT Capital Service Input
 
 
Therefore, economic researchers have recognized that intangible assets play a 
complementary role to ICT equipment. For example, a PC does not work without 
software. The new network or communication equipments may not contribute to 
productivity growth in a firm unless the conventional organizational management and 
human resource management are revised. As a result, the 2007 Economic Report of the 
President in the US stated, “Only when they made intangible investments to 
complement their IT investments did productivity growth really take off.” Although the concept of intangible assets has been developed by international 
economic organizations such as OECD and EU since the 1980s, it took a long time to 
capture intangible assets quantitatively. The pioneering work on the measurement in 
intangible investment at the aggregate level was Corrado, Hulten and Sichel (2009, 
abbreviated as CHS hereafter). CHS classified intangible assets into three types: 
computerized information, innovative property, and economic competencies. 
Computerized information consists of, for example, software and databases. Innovative 
property includes scientific and nonscientific research and development (R&D), where 
the latter refers to, for example, mineral exploitation, copyright and license costs, and 
other product development, design, and research expenses. Finally, economic 
competencies include brand equity, firm-specific human capital, and organizational 
structure.  Following their classification, they measured the amount of intangible 
investment in the US by using several statistics. 
Following CHS, Fukao et al. (2009) measured the aggregate intangible investment 
in Japan. According to their estimates shown in Figure 7, the average annual value of 
intangible investment in Japan from 2000-2005 was 53 trillion yen (408 billion Euros). 
The share of intangible investment in GDP in the same period was 11.1 %, which is 
similar to the estimate for the US and the UK and larger than the estimate for Korea (Table 2). Some characteristics of Japanese intangible investment are that investment in 
firm-specific resources is lower than those in many advanced countries, and that 
scientific R&D investment is the largest among advanced countries.   
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20
30
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trillions of yen Figure 7 Intangible Investment in Japan
Economic 
competencies
Innovative property
Computerized 
information
 
(Source) Fukao et al. (2009) Table 2 International Comparison in Intangible Investment/GDP Ratio
Total investment Computerized
information
Innovative property
Economic
competencies
Japan All industries 11.1 2.2 6.0 2.9
(2000-05)
Manufacturing 16.6 2.1 11.5 3.0
(2000-05)
Service 9.2 2.4 3.6 3.2
(2000-05)
Australia Market economy 9.6 1.3 3.6 4.7
(2005-06)
Canada All industries 9.8 1.0 5.0 3.8
（2005）
France Market economy 8.3 0.9 3.1 4.4
（2004）
Germany Market economy 7.1 0.8 3.5 2.9
（2004）
Italy Market economy 5.2 0.7 2.3 2.2
（2004）
Korea All industries 6.7 1.6 3.2 1.9
(2000-05)
Netherlands All industries 8.4 1.4 1.8 5.2
（2005）
Spain Market economy 5.2 0.8 2.5 2.0
（2004）
UK Market economy 13.0 2.1 3.9 6.9
(2004)
US Non-farm business 13.8 1.9 5.3 6.6
(2000-2003)
(Source) Barnes and McClue (2009), CHS (2009), Fukao et al (2009), Marrano, Haskel and Wallis(2009), Pyo, Chun, and Rhee(2010)  
 
As the amount of intangible investment in Japan is relatively high, but has not 
increased since 1998, the growth rate in intangible assets was very low in the 2000s. 
Thus, the gap in labor productivity growth between Japan and the US in the first half of 
the 2000s is attributable to the gap in intangible assets between the two countries 
described in Table 3. 
 Table 3 Growth Accounting with Intangibles in Japan and the US
(%)
US
1985-90 1990-95 1995-2000 2000-05 1995-2003
Growth rate of labor productivity 4.40 1.65 2.27 2.53 3.09
      Capital deepening 2.66 1.75 1.34 1.17 1.68
        Tangible assets 1.77 1.25 0.86 0.83 0.85
        Intangible assets 0.89 0.49 0.47 0.33 0.84
Labor composition 0.44 0.49 0.51 0.42 0.33
MFP growth 1.30 -0.59 0.43 0.95 1.08
(Source) Fukao et, al. (2009) and CHS (2009)
Japan
 
 
We suspect that the difference in investment behavior between Japan and the US 
is at least partially due to differences in their financial systems. In Japan, financial 
institutions such as banks play a major role in the provision of corporate funds, and they 
typically require tangible assets as collateral to provide financing. As a result, Japanese 
firms have preferred to accumulate tangible assets which can be used as collateral. In 
particular, small firms have been hampered in their growth because they often possess 
insufficient tangible assets to increase borrowing. As Japanese banks tended to be less 
willing  to finance intangible investment after the financial  crisis in the late 1990s, 
intangible assets in Japan have not been accumulated.   
The slow growth in intangible assets means that the new innovative firms such as 
Microsoft, Apple, and Google that led the US growth in the late 1990s are not nurtured in Japan. Hulten (2010) applied the method of CHS to the financial statements of 
Microsoft and measured the contribution of intangible assets the growth of the company. 
Surprisingly, over 40% of sales growth in Microsoft was explained by accumulation in 
intangible assets. 
4. Lessons from the Japanese Experience 
In the 2000s, the Japanese government implemented some growth strategies when 
the Prime Minister changed. However, these growth strategies were merely a 
compilation of the policies that each ministry wanted to promote, and lacked 
consistency. They did not show a coherent vision of the future industry structure in 
Japan to the people and firms in Japan.   
The Japanese manufacturing sector is still competitive in the global market, but its 
share of employment in the total economy is less than 20% and they are not able to 
increase employment. Thus, we have to promote the growth in the service sector where 
an accumulation in intangible assets is more important than the manufacturing sector. 
However, as we showed in the previous section, Japanese intangible investment has not 
increased in the 2000s.   
One reason for the slow growth in intangible assets is the traditional-thinking 
financial sector that does not have the know-how to finance intangible investment, as pointed out in the previous section. Another reason is that firms are reluctant to 
accumulate intangible assets because they focused on some harsh restructuring after 
financial crisis. As a result, the entry rate of new firms that do not have enough tangible 
assets for collateral is decreasing in Japan (Table 8). 
 
0
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2
3
4
5
6
7
8
(%)
Figure 8 Entry and Exit Rates of Japanese Firms
Entry Rate
Exit Rate
 
(Source) Establishment Survey in Japan 
 
The Leaman Shock that occurred in 2008 is similar to the collapse of the bubble 
economy in 1990 and the financial crisis in 1997 in Japan. Many advanced countries in 
North America and Europe are likely to repeat the dismal experiences of the Japanese economy. I have two suggestions for these countries to avoid ‘Japanification’ which 
means a long-term economic stagnation in the 90s and the 2000s in Japan.   
One is that the government should show its vision of the economy to its people 
and firms. After the currency crisis in 1997, Korea totally changed its traditional 
management system and encouraged that the high-technology industry become a key 
industry for economic growth. Recently, the Korean government founded the Ministry 
of Knowledge Economy that has played a major role in informing the Korean people on 
the importance of intangibles. 
The other suggestion is to promote a reform in the financial system to make it 
easier to evaluate intangible assets. According to the recent research in economics, 
productivity growth is attained by active entry and exit. The government should reform 
the financial system so that financial institutions are more easily able to provide 
financing to new entrants that have invaluable technologies and ideas. 
I hope that making an effort to create a knowledge economy will help all 
advanced countries escape from the stagnation trap induced by the Leaman Shock. 
 References 
Barnes, P. and A. McClue (2009), “Investments in Intangible Assets and Australia’s 
Productivity Growth,” Productivity Commission Staff Working Paper.   
Corrado, C., C. Hulten, and D. Sichel (2009), “Intangible Capital and U.S. Economic 
Growth.” Review of Income and Wealth 55, pp. 658-660.   
Fukao, K., T. Miyagawa, K. Mukai, Y. Shinoda, and K. Tonogi (2009),” Intangible 
Investment in Japan: Measurement and Contribution to Economic Growth”. 
Review of Income and Wealth 55, pp.717-736. 
Hulten, C. R. (2010), “Decoding Microsoft: Intangible Capital as a Source of Company 
Growth,” NBER Working Paper No. 15799. 
Marrano, M, J. Haskel, and G. Wallis (2009), What Happened to the Knowledge 
Economy? ICT, Intangible Investment, and Britain’s Productivity Revisited,” 
Review of Income and Wealth 55, pp. 661-716.   
Pyo, H., H. Chun, and K. Rhee (2010), “The Productivity Performance in Korean 
Industries (1990-2008): Estimates from KIP Database,” presented at RIETI/COE 
Hi-Stat International Workshop on Establishing Industrial Productivity Database 
for China (CIP), India (IIP), Japan (JIP), and Korea (KIP) held on October 22, 
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Intangible Capital and U.S.

The Productivity Performance in Korean Industries

What Happened to the Knowledge Economy?

Economic Slowdown in Japan and the Role of Intangible Assets on the Revitalization of the Japanese Economy

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Economic Slowdown in Japan and the Role of Intangible Assets on the Revitalization of the Japanese Economy

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