Downstream investment and focal firm pay drive supply chain spending
A Bank of Japan working paper finds that firm spending behavior in Japanese manufacturing is tightly linked along supply chains. Temporary foreign demand shocks drive bonus spillovers, while downstream activity and focal firms influence supplier investment and regular wage decisions.
Bonus spillovers follow demand shocks
Analyzing production network data covering 13,013 Japanese manufacturing firms and 81,053 firm-level transactions, Bank of Japan researchers examine how corporate spending propagates along supply chains.
The empirical findings show that temporary foreign demand shocks induce strong bonus linkages across direct and indirect exporters, with sales elasticity of bonuses standing near 1.00 across both channels.
However, temporary foreign demand shocks do not generate clear linkages in base salaries or capital investment.
Regular wage setting exhibits strong synchronization with focal firms positioned downstream, particularly within transport equipment supply chains.
Tier 1 suppliers adjust wages shortly after focal firms decide.
Capital investment flows upstream
Capital investment exhibits strong downstream-to-upstream linkages, with customer activity directly stimulating supplier capital spending.
Empirical estimates confirm that a firm's investment-to-capital ratio increases in response to downstream investment shifts.
This synchronization is most pronounced in component-heavy sectors like steel, non-ferrous metals, and transport equipment.
Additionally, capital spending by overseas subsidiaries moves in tandem with the foreign expansion of domestic customer firms, extending Japanese supply chain linkages globally.
Hierarchies restrict policy impact
The study convincingly shows that macroeconomic models overlook key supply chain linkages.
By proving that wage and investment decisions depend on lead downstream firms, the findings highlight clear limits to uniform monetary stimulus.
Central banks must account for these corporate hierarchies to gauge wage growth accurately.