Production smoothing in the Japanese vehicle industry

Physical data from the Japanese vehicle industry, covering monthly observations from 1985:1 to 1994:12, are investigated across nine goods, ranging from bicycles to large buses. Smaller variance of production is found relative to sales across all goods for unadjusted data and in 17 out of 18 cases for seasonally adjusted data. Such evidence in favor of the production smoothing model (PSM) is confirmed by full information maximum likelihood employed jointly on inventories and sales equations. The estimates suggest the industry operates in the range of increasing marginal costs in six out of nine goods. Positive costs of being away from targeted inventory are also present in six out of these nine goods, which make the PSM a good description of this industry.