When Did Firms Become More Different? Time-Varying Firm-Specific Volatility in Japan

We document how firm-specific volatility in sales, earnings and employment growth evolved year by year in Japan. Our volatility measure also indicates the evolution of firm turnover. We find that patterns in firm-specific volatility have changed when macroeconomic circumstances have. Firm turnover declined during the economic stagnation of 1991-1997. The deep downturn of fiscal years 1998-2002 coincided with a substantial increase in turnover in market, profit and employment shares. Firm volatility tended to decline during the recovery after 2002. We assess whether the rise in firm turnover and deep downturn in 1998-2002 indicate that after a period of stagnation, weak firms were finally allowed to shrink or fail. Our evidence suggests that the widening in the firm growth distribution at that time did not reflect weak firms shrinking relative to healthy firms, indicating that the two recessions in 1998-2002 were not 'cleansing'.

Keywords: Firm volatility, firm health, zombie lending, cleansing recessions
JEL codes C33, D22, E32, E44

Working paper no. 351