1989 Reports

Inventory behavior and economic instability in Japan

Wilkinson, Maurice

The purpose of this paper is to analyze whether or not the behavior of Japanese inventory investment is consistent with the U.S. and Western European experience. The behavior of Japanese inventory investment could differ due to such factors as industry inventory management techniques (the "just in time" system), the relative influence of demand versus cost shocks, the relation between the level of output and the convexity (and or concavity) of the production function, and the ability of Japanese firms to successfully backlog unfilled demand. The next section of this paper examines the contribution of inventory investment to economic instability in Japan and compares the results with the U.S. and four large European economies. Section 3 specifies a general model of inventory investment and presents estimates of the model for Japan. The final section contrasts the results of this study with those for other countries and summarizes the principal conclusions.