Asymmetric Shocks and Regional Risk Sharing: Evidence from Japan

We use the methodology of Kalemli-Ozcan, Sorensen, and Yosha ( 2003) to calculate the degree of insurance among the Japanese prefectures. Prefectural-level data for fiscal years 1975 to 1999 are used to analyze the impact of idiosyncratic shocks to regional income. The results indicate that about 20 percent of idiosyncratic shocks to regional income are absorbed by inter-regional income insurance through the capital market, about 10 percent is absorbed by the national government through the inter-regional tax transfer system, and about 60 percent is absorbed as a result of changes in saving and dissaving.