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Hanazaki and horiuchi in this issue are not the only

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Unformatted text preview: a failure to perform well across the board in 15 existing industries. These results may, as Wolff suggests, be dominated by the cyclical effects of recession.15 Alternatively, they may be tantalizing evidence that the problem lies in the other area of weakness of the Japanese model—the supposed tendency to excessive investment (and misallocation of resources within existing, established firms). Hanazaki and Horiuchi, in this issue, are not the only authors to indict the financial structure, and the role of the banks in particular, in encouraging overborrowing and excess investment as a result of lax corporate governance and interconnected lending. The argument rests on the very rapid growth of investment during the bubble years of the 1980s, which brought ratios of gross capital formation to GDP to high levels both historically and in international comparison. Many observers regarded these levels as extreme, and there are frequent references to the low return to capital in Japan. There is little doubt that measured rates of growth of capital productivity during the 1990s have been quite low, but it is not straightforward to distinguish the cyclical compone...
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