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ABSTRACT
This study empirically investigates the causal relationship between financial development, trade openness and economic growth in Japan covering the period 1960-2003. Results suggest that a long run equilibrium relationship exists between financial development, trade and economic growth in Japan except between domestic credit (second measure of financial development), trade and growth. The results of Granger Causality tests suggest that financial development as proxied by broad money gives causation to economic growth that supports the supply-leading growth hypothesis for the Japanese economy and support the growth-driven trade (GDT) hypothesis, which claims that economic growth causes "more efficient imports and exports" for Japan.
JEL Classification: C32, C53, Q22.
Keywords: Financial Development, Growth, Granger Causality, Japan.
1. INTRODUCTION
Investigation about the factors that determine economic growth has been a major effort of economists in both developed and developing countries. Several explanations have been proposed, such as financial development, trade openness, capable legal system, impressive institutional framework, or education drive. In recent years, financial development and trade openness have received much attention in theoretical as well as empirical literature as a major determinant for economic growth. For example, for many Asian countries, identification of the connections between financial development, trade openness, and economic growth, in particular after the 1997 Asian financial crisis, from one side, and the challenges and necessities for global trade in the World Trade Organization framework from other side, became a vital parameter in making the long run fiscal and monetary policy plans. Therefore, several countries have focused more on the financial reforms and a revision of trade openness to strengthen the stability of their economies and to promote higher economic growth.
The direction of causality between financial development and economic growth and trade openness is thus of special relevance for the many countries. The explanation of this direction will help the authorities in determining the strategy for further expansion of financial development and trade openness in relation to other basic reforms in real sectors, in order to promote growth. According to the two famous "supply leading" and "demand following" hypotheses, if financial development causes growth, policies should emphasize more on die reforms to accelerate the development of the financial sector as promoter of economic growth. If, on the contrary, real sector development causes...