Original Paper


, Volume 34, Issue 3, pp 247-271

First online:

Technical change in a bubble economy: Japanese manufacturing firms in the 1990s

  • Takanobu NakajimaAffiliated withFaculty of Business and Commerce, Keio University
  • , Alice NakamuraAffiliated withSchool of Business, University of Alberta
  • , Emi NakamuraAffiliated withColumbia Business School and Department of Economics, Columbia University
  • , Masao NakamuraAffiliated withSauder School of Business, University of British ColumbiaInstitute of Asian Research, University of British Columbia Email author 

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An important economic policy issue is to ascertain when and if technical change (TC) is driving measured growth in productivity. Was this the case for Japan during the late 1980s when a massive financial bubble was being formed? This paper addresses this question, after first further developing methods needed for this purpose. The movement of firms’ TC is of particular policy interest to Japan whose economy has been suffering from a prolonged recession for more than a decade since the burst of the bubble in 1990. In the period of time immediately prior to the burst of the bubble, our estimation results show a significant drop in technical progress. What we believe these results reflect is that Japanese manufacturing firms made excessive investments in production inputs in the years when the bubble was being formed. This excessive investment in inputs did not contribute positively to TC and hence the measured productivity and economic growth of the bubble period in the late 1980s was unsustainable.


Technical change Total factor productivity Economies of scale Japan Index number method

JEL classification

O3 O47 O53 O49