Japan’s Economic Growth and Information Technology Potential Despite Fumbled Innovation

The purpose of this paper is to measure the influence of information technology (IT) on Japanese economic growth. For this purpose, we first conduct growth accounting analysis for data acquired over the last 30 years, reviewing the contribution of information technology to economic growth. Then we estimate and simulate production function models that incorporate IT capital stock and network effects explicitly. These analyses yield four observations. First, the Japanese economy has experienced sluggish IT investment since the 1990s, although it had a massive investment boom in the late 1980s. Second, growth accounting analysis reveals that information technology has not contributed changes of productivity growth since the 1990s, when new types of open-network technology prevailed throughout the world, although it had surely influenced the productivity growth until the late 1980s. Third, estimation of the production function model proves that IT capital stock and network effects significantly influenced the economy, which suggests that sluggishness of IT investment plunged the economy into a lower growth path since the 1990s. Fourth, simulations of the production function model demonstrate that the economy has potential to grow at a higher rate than the consensus belief of less than two percent. Consequently, it could be argued that the Japanese economy, for which we have not yet seen a new economy, still has fair room to accelerate economic growth if it were somehow able to maximize the benefits of innovation, which the economy has fumbled during the last decade.