Simulating Japan's Alternative Growth Paths: Production Function Model Analysis on the Impact of Information Technology

The purpose of this paper is to explore whether it is realistic to assume that information technology （IT） will contribute and accelerate Japan’s future economic growth． For this purpose， we estimate and simulate production function models that incorporate IT capital stock and network effects explicitly． These analyses yield three observations． First， the Japanese economy has experienced sluggish IT investment since the 1990s， when new types of open－network technology prevailed throughout the world， although it had a massive investment boom in the late 1980s． Second， estimation of the production function model proves that IT capital stock and network effects markedly influenced the economy， which suggests that sluggishness of IT investment plunged the economy into a lower growth path since the 1990s． Third， 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 can be argued that the Japanese 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．