Stabilization in the Volatility of Output: A Decline in Cross-industry Comovements

Output volatility in Japan's manufacturing sector has been stabilizing from a long-term perspective and this tendency has become noticeable in recent years. In this current economic expansion, the volatility of overall production has been reduced, since cross-industry comovements have declined and thus fluctuations of individual industries have offset one another. This decline in cross-industry comovements has two driving factors: (1) diversification of the types of goods whose demand is expanding, reflecting the fact that global economic growth is now supported by a more diverse range of countries in response to the high growth of emerging economies such as BRICs, and (2) weakening interactions among domestic industries due to the progress in the international division of labor. As a consequence, a shock in an industry is unlikely to spillover to other domestic industries. These factors suggest that by and large, domestic production is unlikely to be affected by a single negative shock. It should be noted, however, that the volatility of Japan's production may increase with increased cross-industry comovements, when there is a significant shock that triggers global comovements.