The Japanese business cycle from 1980 to 2007 portrays a less contemporaneous correlation of labor with output than in the United States, and in addition labor tends to lead output by one quarter. A canonical real business cycle model cannot account for these facts. This paper uses the business cycle accounting method following Chari, Kehoe, and McGrattan (2007) and shows that efﬁciency and labor market distortions are important in accounting for the quarterly business cycle ﬂuctuation patterns in Japan. Fiscal and monetary variables such as labor income tax, money growth, and interest rates cannot fully account for the distortions in the Japanese labor market.
Keywords: Business cycle accounting; Japanese labor market
Views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies.