Japan's Lost Decade: Did Decline in Innovation Lead to Loss of Competitiveness in Japanese Industries?

It is widely recognized that technological progress in the Japanese economy slowed down during the so-called "Lost Decade" of the 1990s. We attempt to shine additional light on the economic implications of this general slowdown in technological progress by examining the effect of changes in innovativeness over time on the international competitiveness of Japanese industries. Our econometric analysis deploys industry-level panel data on patenting activity and Japanese exports to the United States. We find that the loss of competitiveness in Japan's exporting industries in the 1990s is closely related to eroding growth in the innovativeness of these industries.