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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