The Model:

To examine the behavior of the Japanese economy, I formulated the following model, taken from Fair’s MCF model:

Equation 44: JALIMZ = -0.014 + 0.976*JALIMZ(-1) + 0.028*JALCIGZ + 0.04*JALPYZZ + [AR(-1)=0.134]

SE= 0.032

The log of imports per capita depends strongly on its out past, the relative price of imports and the log of domestic demand.

Equation 45: JALCZ =0.127 + 0.904 *JALCZ(-1) - 0.001*JARB + 0.071*JALYZ +[AR(1) = -0.233]

SE= 0.0098

The log of consumption per capita depends strongly on its past, the log of real GDP per capita and depends slightly on long-term interest rate.

Equation 46: JALY =0.028 + 0.070 *JALY(-1) + 0.928*JALX - 0.0007*JALV(-1) +[AR(1)=0.501]

SE = 0.003

The log of real GDP depends strongly on log of final sales, and depends slightly on the log of real GDP last year and the log of stock of inventories in past year.

Equation 47: JALPY = 0.015+ 0.988*JALPY(-1) - 0.0001*T +0.005*JALPM +[AR(1) =0.547]

SE = 0.007

The log of GDP or GNP deflator depends strongly on the log of GDP deflator in last year, and depends slightly on the log of import price deflator.

Equation 48: JARS = -0.115 + 0.834* JARS(-1) + 0.0998* JAPCPY+ 0.102* USRS +[AR(1)=0.347]

SE = 0.533

Three-month interest rate depends strongly on previous three-month interest rate, and depends slightly on US three-month interest rate and percentage change in relative price index.

Equation 49: JARBZ = 0.039 +0.888* JARBZZ +0.443*JARSZ -0.472*JARSZZ

SE = 0.409

Long term interest rate minus the period before last period three-month interest rate [RB-RS_2], depends strongly on [RB_1 - RS_2] , [RS - RS_2] and [RS_1 -RS_2]

Equation 50: JALE1Z = -0.119 -0.394*JALRSZ + [AR(1)=0.343]

SE = 0.046

The change in log of exchange rate depends on the log of [RS-RS_2]

Equation 51: JALF =1.001*JALEE +1.156*JALRSZ +[AR(1) =0.411]

SE = 0.008

The log of three month forward rate depends on the log of exchange rate and log of [RS-RS_2]

Equation 52: JALPXA=0.394* JALPXB +[AR(1)=1.269] + [AR(2)=-0.278]

SE = 0.013

Equation 53: JALJ1 = 0.006 -0.0001* T -0.034*JALEXL(-1) -0.046*JALY1

SE = 0.0035

The log of total employment depends slightly on log(employment/Employment-min) and change in log of output.

Equation 54: JALL1Z = -0.012 + 0.0001*T +0.972*JALL1Z(-1) -0.126*JAUR

SE = 0.003

The log of labor force per capita depends strongly on the log of labor force per capita from last period and depends slightly on unemployment rate.

Analysis:

External Shocks

Exports: As we can see from the graph below, Japan suffered a large drop in exports along with output during the recession. The following graphs and tables demonstrates that, had Japanese exports not fallen, the recession would have been not occurred. The table on the right shows that the cumulative loss in Japanese GDP due to this factor was 12,798 billion Yen.

Import Prices: As we can see from the graph below, import prices also fall along with the output. Had this not happened, showed from the…