Using Japanese firm-level data for the period from 1994-2002, this paper examines whether a firm is chosen as an acquisition target based on its productivity level, profitability and other characteristics and whether the performance of Japanese firms that were acquired by foreign firms improves after the acquisition. In our previous study for the Japanese manufacturing sector, we found that M&As by foreigners brought a larger and quicker improvement in total factor productivity (TFP) and profit rates than M&As by domestic firms. However, it may argued that firms acquired by foreign firms showed better performance simply because foreign investors acquired more promising Japanese firms than Japanese investors did. In order to address this potential problem of selection bias problem, in this study we combine a difference-in-differences approach with propensity score matching. The basic idea of matching is that we look for firms that were not acquired by foreign firms but had similar characteristics to firms that were acquired by foreigners. Using these firms as control subjects and comparing the acquired firms and the control subjects, we examine whether firms acquired by foreigners show a greater improvement in performance than firms not acquired by foreigners. Both results from unmatched samples and matched samples show that foreign acquisitions improved target firms' productivity and profitability significantly more and quicker than acquisitions by domestic firms.Moreover, we find that there is no positive impact on target firms' profitability in the case of both within-group in-in acquisitions and in-in acquisitions by domestic outsiders. In fact, in the manufacturing sector, the return on assets even deteriorated one year and two years after within-group in-in acquisition, while the TFP growth rate was higher after within-group in-in acquisitions than after in-in acquisitions by outsiders. Our results imply that in the case of within-group in-in acquisitions, parent firms may be trying to quickly restructure acquired firms even at the cost of deteriorating profitability.

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Although Japan had largely resolved the problem of non-performing loan by the early 2000s, economic growth hardly accelerated, resulting in what now are "two lost decades." This paper examines the underlying reasons from a long-term and structural perspective using a KLEMS-type database and micro-level data. Major issues examined include the chronic lack of domestic demand since the mid-1970s caused by the long-run decline in capital formation through the slowdown in the growth of the working age population as well as the resulting current account surplus and yen appreciation, and supply-side issues such as slow TFP growth due to Japan's low

Constructing a database of 37 industries, we examine whether the measured productivity in Japan is pro-cyclical and investigate the sources of this pro-cyclicality by using the production function approach employed by Hall (1990) and Basu and Fernald (1995). The aggregate Solow residual displays pro-cyclicality. A large number of industries show constant returns to scale. No significant evidence for the presence of thick-market externalities is found. Our results also hold when we consider labour hoarding, part-time employment, and the adjustment cost of investment. The results indicate that policies to revitalize the Japanese economy should concentrate on promoting productivity growth. JEL Classifications: E32, O47.

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