Renewable and Sustainable Energy Reviews 54 (2016) 1073–1084

Contents lists available at ScienceDirect

Renewable and Sustainable Energy Reviews

journal homepage: www.elsevier.com/locate/rser

Effects of financial development, economic growth and trade on

electricity consumption: Evidence from post-Fukushima Japan
Abdulkadir Abdulrashid Rafindadi a,n, Ilhan Ozturk b
a
Faculty of Social Sciences, Department of Economics Usmanu Danfodiyo University, Sokoto, Nigeria
b
Faculty of Economics and Administrative Sciences Cag University, Adana -Mersin karayolu, 33800 Yenice, Turkey

art ic l e i nf o a b s t r a c t

Article history: This study examines the long-run and short-run effects of financial development, economic growth,
Received 11 May 2015 export, imports and capital on the Japanese energy predicaments as a result of the foregoing energy crisis
Received in revised form in the country. To ensure a robust outcome, the study applied the extended Cobb–Douglas production
12 July 2015
function and used time series data from 1970 to 2012. Following to this, structural break unit root test,
Accepted 19 October 2015
ARDL bounds test approach to cointegration and the Johansen cointegration test were applied. In
addition, the VECM Granger causality framework was used in determining the causal relationship
Keywords: between the variables. The findings of the study establish that, in the long-run a 1% rise in financial
Financial development development, economic growth, exports and imports in Japan will exert a significant pressure on the
Growth
Japanese electricity consumption by 0.2429%; 0.5040%; 0.0921% and 0.2193% respectively. However,
Energy consumption
capital was found to decline energy consumption in all material respect. In the short-run, the study
Cobb–Douglas
discovered how a 1% rise in the dynamics of financial development, economic growth, exports and
imports to add to the Japanese electricity predicaments by 0.2210%; 0.5840%; 0.0521% and 0.2031%
respectively. The existence of the feedback relationship between most of the variables was discovered,
while, economic growth, exports, imports, and trade openness were found to Granger-cause electricity
consumption. The study advocates the adoption of massive but competitive renewable energy system in
Japan. How it should be done and why it should be done are carefully set by this study.
& 2015 Elsevier Ltd. All rights reserved.

Contents

1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1073
2. Literature review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1075
3. Data and methodological framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1076
4. Results and discussions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1077
4.1. Exports model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1080
4.2. The VECM Granger causality analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1080
5. Conclusion and policy implications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1081
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1083

1. Introduction productivity. It is also argued that electricity consumption facil-

itates sustainable economic growth and ensures the continuity of
Multiplicity of energy economics literature have established national prosperity irrespective of the direction of causality. Fol-
that electricity consumption is a crucial element to national lowing to this, the fast-growing need among nations for a sig-
nificant rise in sustainable economic growth is increasingly
n becoming a competitive challenge considering the damages cre-
Corresponding author.
E-mail addresses: aarafindadi@yahoo.com (A.A. Rafindadi), ated by the periods of recent financial crises. In addition to that,
ilhanozturk@cag.edu.tr (I. Ozturk). the need to attract and sustain the huge volume of international

http://dx.doi.org/10.1016/j.rser.2015.10.023
1364-0321/& 2015 Elsevier Ltd. All rights reserved.
1074 A.A. Rafindadi, I. Ozturk / Renewable and Sustainable Energy Reviews 54 (2016) 1073–1084
investment inflow through FDI and other international investment
mechanism constitute the cornerstone of every nation. This is
because; investment without sufficient, efficient and sustainable
energy is of no significant value. Equally important is the fact that
the old existing economic literature which emphasized for coun-
tries to pursue international trade has now been condemned due
to the recurring negative influence of unprecedented financial
crisis Tang et al. [40]. Following to this, electricity is seen as a
multifaceted development carrier in a modern global economy
that has the embodiment and the characteristics of cementing and
sustaining human welfare, investment, productivity, exports and
imports. These factors in turn accelerate the tides of national
economic growth and prosperity. In spite of key economic dama-
ges afflicted by the recent financial crisis to the Japanese economy
which rendered the second global economic giant to drop to the
third position, yet, Japan in 2011 was afflicted by a natural disaster.
The 9.0 earthquake in Fukushima Daiichi was reported to have led
to the shutdown of 8 nuclear plants. This development resulted in
a considerable loss of electricity production, physical and human
capital. The combined effect of this phenomenon caused addi-
tional stress on the country’s economic growth wherewithal.
According to the Japanese ministry of trade and industry [17], the
damages caused by this disaster were approximated to range
between USD 195 billion to USD 305 billion. The latter amount
(USD 305) was estimated to be equivalent to the quadruple cost of
damages caused by Hurricane Katrina’s $81 billion, and almost
equivalent to Greece’s GDP, and two times the GDP of the New
Zealand Nanto et al. [26]. These are apart from insurance claims
estimated at the tune of USD50 billion. While the cost of nuclear
pollution and contaminants were to date not confirmed.
Additional substantiation provided by the IHS Global Insight
[14] pointed out that economic growth in Japan was envisaged to
have a significant boost to an estimated level of 0.5%, after the
2007/2008 financial crisis; unfortunately, the Fukushima disaster
overturned these expectations to a 0.0% level of economic growth
in March 2011. These myriads of economic traumas plunged the
Japanese economy into deep recession, making the economy to
contract by 3.6%. Following this development, and to show that
the level of economic recession had not improved much up to
2014, the Economic Watch [7] reported in the third quarter of the
same year, that Japan was expecting 0.4% contraction in its econ-
omy, but disappointingly the outcome shows an exceeded figure to
the range of
0.5%. In another related development, The Inter-
national Business Outlook [41] reported that Japan’s national debt
was estimated at 1 quadrillion Yen that is USD 10.46 trillion, in the
second quarter of 2014. These figures were reported to be far
greater than the German, France, and the United Kingdom
economies combined. These massive debts were estimated to be
240% of the Japanese GDP. Parallel to this development and con-
sidering the contentious economic doldrums recorded in Japan
during the Fukushima energy crisis, the value of the yen was
reported to have deteriorated from 83.8 Yen/USD on February 15,
2011, to 122 Yen/USD in 2012, and down to 118.45 in 2015. To
reduce the negative consequence of the devaluing position of the
Yen on the Japanese trading relationship with the outside world,
Nanto et al. [26] pointed out that the Bank of Japan injected $418
billion (i.e. 33 trillion Yen) into the financial markets, becoming a
far more exceeding figure of what was injected to salvage the “too
big to fail” companies in the US as a result of the 2008 financial
crisis which is put at USD 300 billion [11].
The implication of a devaluing yen amidst crisis and shrinking
economy was observed in the possibility of making the Japanese
productive entities and exports weaker and less competitive in the
world markets. In addition to that, since China's Yuan has been
linked closely to the value of the dollar, the Chinese exporters are
likely to gain further price competitiveness relative to those from
Japan and this will ultimately affect the Japanese exports and
hence an increased balance of trade problems. To show the
implication of this development, the Economic Watch [7] reported
that the trade deficit in Japan as at September 2014 deteriorated to
JPY 767 billion.
In spite of the above economic adversities, Japan was said to be
the second-highest electricity consumer in Asia. In 2012, the
country's total electricity generation was put at less than 1000
Terawatts [13]. The IEA [13] continue to assert that the decom-
position of that bloc figure shows that 338 TW h was obtained
from coal, while 408 TW h from gas while only 14 TW h was
generated from nuclear as against 274 TW h that was produced
from the same nuclear energy in 2010. In addition to that
161 TW h was also produced from fossil fuel and this figure was
found to increase by 94 TW h as against what was obtained in
2010. Similar to that line of development, 84 TW h was also found
to have been produced from hydro. Surprisingly, the contribution
of renewable energy in Japan in 2013 was found to be meager, and
it was estimated in that period that solar energy contributed 10
TWh and 5 TW h from wind electricity generation. In addition to
that, geothermal was found to contribute 2.6 TW h, biomass and
waste 41 TW h. The EIA [8], continue to assert that in May 2012
Japan was found to have lost completely its wherewithal’s of
producing nuclear energy power for the first time in over forty
years and this was due to the devastation of the 2011 earthquake.
In a bid to save the country from massive energy shortages, the
government managed to operate two reactors in July, 2012 which
produced an estimated nuclear energy of about 2.4 GW, following
to other observed complications from the operation of these two
reactors, the government decided to halt their operation in Sep-
tember, 2013, thus leaving Japan with a complete loss of nuclear
energy for the second time in the history of the country. Following
to this development, and considering the enormous electricity
shortages Japan is suffering from the EIA [8] pointed out that Japan
had to resort to massive rolling blackouts and at times the risks of
unprecedented blackouts were also observed. This development
reduced the outputs of major existing energy intensive companies
operating in Japan. There was also a significant tension for the rise
in the cost of electricity production and consumption in the
country as claimed by the EIA [8].
From the foregoing development, the major contributions of
this study is to examine the position of the long-run and short-run
effects of the Japanese exports, imports, financial development
and economic growth on the current electricity predicaments of
the country. To ensure this, the study determines at what degree
could the selected variables exert significant pressure on the
country’s electricity demand and how could this be responsible to
the slow piquing of the country’s economic growth prospects? In
addition to that, the study also investigates if the current capital
formation processes of the country have additional pressure to the
electricity predicaments of the country? From these empirical
findings, the study assesses the likely policy implications and
offers some recommendations. To make this study unique and
apart from its multivariate contributions, the study used the most
extensive econometric estimation procedures and also ensured the
application of up to date econometric methodology. In this new
dimension, the study applied the extended Cobb–Douglas pro-
duction function and used time series data for 1970–2012. It is
remarkable to evaluate the case of Japan in order to establish if
there is any positive outlook for the possibilities of the economic
growth prospects for the former No. 2 world economic giant. The
findings of this study will equally be a lesson to other countries
with similar electricity and macroeconomic challenges. To ensure
successful accomplishment of this study, this paper is organized in
five sections: apart from the introduction above, section two
provides recent empirical literature reviews linking energy
 A.A. Rafindadi, I. Ozturk / Renewable and Sustainable Energy Reviews 54 (2016) 1073–1084
consumption, trade openness, financial development and eco-
nomic growth; Section 3 is the methodology section which
introduce the data, the model specification, and the model esti-
mation procedure; Section 4 contains the results and discussion.
Finally, Section 5 presents the conclusion and policy implication.
2. Literature review
The existence of overwhelming researches on electricity con-
sumption and economic growth nexus in the energy economics
literature has to date not determined an ending search or a
balanced ground on electricity consumption and economic growth
among continents. For instance, the assertions of Ozturk [31] and
Omri [29] outlined a comprehensive literature survey on the
determinants of energy growth nexus and also on the electricity
growth nexus. This captivating development motivated early
researchers to underscore the contributions of energy consump-
tion to economic growth in advanced economies. For instance,
Rafindadi [34] established how the effects of financial develop-
ment and trade openness influence the German energy con-
sumption. The findings of the author further uncovered economic
growth to be the cardinal element that piques energy consump-
tion in Germany. Other variables of the study used by the same
author discovered how financial development, capital use, and
trade openness tend to have a negative influence on the German
energy demand. In contrast to the findings of [34,35], the author
identified how the expanding economic growth prospects of the
United Kingdom could pose a threat to the country’s existing
energy predicaments. Although the results of the author indicated
that economic growth is negatively linked with energy demand in
the United Kingdom. In contrast to that, the study discovered how
the negative trade balances of the United Kingdom to be the major
additive factor to the country’s electricity predicaments. The
comparative influence of these studies indicates that electricity
consumption and economic growth have no single unified direc-
tion in which it contributes to a country’s economic growth pro-
spects. These developments warrants endless searches in the field
of energy economics in both tranquil and in energy crisis periods.
Kwon et al. [21] analyzed the effects of induced reduction of
electricity consumption through raising electricity tariffs in the
short-run due to the escalation in electricity demand by most
countries. The findings established that a reduction in electricity
use affects economic activity, thereby, impacting negatively on the
profitability, employment prospects, national output, and subse-
quently economic growth. Sun and Anwar [39] applied the context
of trivariate vector autoregressive framework to study the rela-
tionship between entrepreneurship, electricity demand and
industrial production outputs with respect to Singapore's manu-
facturing entities. The findings reveal the existence of a feasible
long-run relationship between electricity demand and entrepre-
neurial output in Singapore. According to the results, the growth
hypothesis concerning energy consumption and economic growth
are validated in the case of Singapore. In another related devel-
opment, using panel of 160 countries from 1980 to 2010, Karanfil
and Li [18] concluded that high electricity consumption was found
to be sensitive to regional differences, continental income varia-
bility, degree and level of urbanization attained and supply risks.
Mouton [25] in his research contributions examined the impacts of
electricity sector reforms in the Philippines, which took place in
the year 2000. The aim of the author is to assess whether the
impacts of the Philippines electricity sector reform could have an
effect on the country’s electricity supply and tariffs. The findings of
the study suggested the need for ensuring efficient electricity
supply and clearer electricity regulatory framework which should
1075
be accompanied in the reform models if the impacts of the reform
exercise are to permeate in all sectors of Philippines economy.
Fukushige and Yamawaki [12] studied the factors that neces-
sitate electricity supply constraint, electricity generation capacity
and the factors accounting for electricity demand in Taiwan. The
findings of the authors established that electricity consumption in
Taiwan is fraught with key supply constraints in the early periods
of 1959–1972. In 1973 electricity generation capacity was found to
have attained an efficient level in Taiwan. Following this investi-
gation, the authors established that the economic growth prospect
of Taiwan came to be more robust during that period. The con-
clusion of the authors unanimously agreed that ordinary Granger
causality approach are not in any way efficient and effective in
revealing the relationship that may exist between electricity con-
sumption and economic growth of a country. They further argued
that in most parts of the developing world of today, electricity
supply constraint sometimes plays a significant role when inves-
tigating the relationship between energy consumption and eco-
nomic growth. Marques and Fuinhas [24] studied the comparative
impacts of renewable sources of energy which they termed as
special regime and the conventional sources of electricity which
they termed as the ordinary regime using the Portuguese elec-
tricity generation network. In the first instance, the authors
appraised the relationships that exist between the two regimes
and the respective economic activities that ensued within them.
The findings of their study established the existence of a com-
plementary relationship between the two regimes. While key
economic activities were found to cause significant rise in elec-
tricity consumption, however, in a more close analysis it was
discovered that it is the special regime that causes more economic
boom and contrary was found to be the case with respect to the
ordinary regime.
Using a panel of 224 cities in China from 2002 to 2007, Elliott
et al. [9] assessed the possibilities of whether declining economic
growth in China could be attributable to poor energy distribution
network. To ensure robust outcome from this study, the authors
applied the leading electricity network distribution theory. While
the propositional law of power distribution was used as the main
gauging factor in the study. The propositional law established that
the size of an economy and its prospects of energy consumption
could be measured on the basis of capital by capita and this should
be anchored on the basis of the electricity consumption per capita.
According to the authors, the law of efficient electricity distribu-
tion is based on the direction that if an exponential bound of ½
and ¾ is discovered in the study then the existence of distribu-
tional efficiency in China is quite certain. Following this estab-
lishment, the findings of the authors discovered a result that is a
bit higher than 2/3 and these estimates were compared with
similar finding of a US-based study conducted in 2011. This
development compelled the authors to succumb to the fact that
their study is more robust than the findings obtained with respect
to that of the US. In conclusion the authors, however, noted the
currency of the period in which they conducted their study and
this made them draw an observation that by implication of their
findings there exist significant drawbacks on the overall energy
distributional efficiency network particularly at the tail end of the
study period.
Kim [19] conducted a study that aimed at developing an elec-
tricity convergence parameter with respect to the level of devel-
opment attained by 109 continents. To ensure this, the modeling
pattern of the case study areas were allowed to exhibit apparent
heterogeneous properties using the log t test convergence meth-
odology. From this analysis, the study reported that, the 109
samples converged at a point indicating significant electricity
intensity but the finding did not explain the level of per capita
electricity consumption of the continents in comparison with the
1076 A.A. Rafindadi, I. Ozturk / Renewable and Sustainable Energy Reviews 54 (2016) 1073–1084
level of development that has been achieved in those continents.
In this respect, the study proceeds to apply the multi-component
model that decomposed the position of the selected continents. In
that second stage analysis, the study discovered how 24 developed
economies exhibited strong convergence with respect to all indi-
cators. The study concluded that electricity consumption is a sig-
nificant indicator to the rise in per capita income in those con-
tinents which in turn leads to economic development in the
selected sample.
On the aspect of electricity efficiency and competitiveness, the
study of Nazemi and Mashayekhi [28] identified how the recently
restructured Iranian electricity market impacted positively on the
country’s energy production and distribution. In their study, the
authors used 2006 and 2012 as the lead study periods. The find-
ings indicated an insignificant contributions of the restructured
electricity market in enhancing electricity production and com-
petitiveness in the early periods. The study then proceeds to
investigate the dynamics of electricity demand in the after
restructuring periods i.e. 2012 and the effects generated by pro-
duction efficiencies. The two periods were then compared to
determine a common benchmark. The findings of the authors
established a non-efficient tendency in both periods. This situation
were found to be attributable to electricity marketing distortions
commonly traceable to the learning curve effects in the post-
restructuring periods, and this have greatly impacted on the newly
restructured electricity market in Iran.
Al-Mulali and Che Sab [1] examined the impact of energy
consumption on the economic and financial development of 19
countries by taking the periods of 1980 to 2008. The results show
that energy consumption enables these countries to achieve high
economic and financial development. However, the high devel-
opment that these countries have achieved in the late three dec-
ades increased the CO2 emission of the respective continents.
Kyophilavong et al., [20] explored the relationship between energy
consumption, trade openness and economic growth in case of
Thailand. The findings of the authors showed how energy con-
sumption could stimulate economic growth and how Trade
openness could add to economic growth. Also, the findings of the
authors established that the causal relationship between the
variables in the case of Thailand showed energy consumption is
the Granger-cause of economic growth in that country. Omri et al.
[30] applied simultaneous equation modeling approach in a panel
of 12 MENA countries from 1990–2011. The author aims to
investigate the impacts of the relationship that may subsist
between financial development, CO2 emissions, trade and eco-
nomic growth. The results showed the existence of bidirectional
causality between CO2 emissions and economic growth. In addi-
tion to that, the study further identified the existence of bidirec-
tional causality suggesting the interrelationship between eco-
nomic growth and trade openness. Moreover, the feedback
hypothesis was discovered. These discoveries validated the exis-
tence of a perfect relationship to exist between trade openness
and financial development. The causality relationship, on the other
hand, reveals the existence of unidirectional causal relationship
from financial development to economic growth and from trade
openness to CO2 emissions. The authors concluded with assertion
that the environmental Kuznets curve does exist in all continents
and that policy makers have significant policy challenges of bal-
ancing the impacts and implications of the findings in order to
ensure a balanced environmental benefits and efficient energy use
in the respective MENA countries studied.
From the perspective of the above reviews, there are very
limited studies on the relationship between electricity consump-
tion and economic growth in the case of Japan. To the best of our
knowledge, there are only 5 studies in which electricity
consumption-economic growth nexus has been examined for
Japan. In the four of these studies [23,3,37], discovered the exis-
tence of causality running from electricity consumption to eco-
nomic growth and no causal relationship is found in the study of
Narayan and Prasad [27]. In addition, Cheng [5] found the exis-
tence of a causal relationship from GDP to energy consumption,
Erol and Yu [10] found bidirectional causality, and Soytas and Sari
[38] found causality from energy consumption to GDP for Japan.
Most of these studies were using only two variables (energy
consumption and growth). In other words, they employed bivari-
ate models that cause an omitted variable problem. To avoid this,
the current study employed multivariate modeling approach and
taking the post-Fukushima energy crisis in Japan which plunged
the country into series of electricity and macroeconomic chal-
lenges. The aim of this study apart from its multivariate modeling
approach is to figure out the long-run and short-run macro-
economic repercussion of electricity consumption on the Japanese
economic growth prospects.
3. Data and methodological framework
The study applied time series data from 1970 to 2012. The data
sets were obtained from the World Bank Development Indicators
[42] (CD-ROM). The variables used in this study are real GDP,
energy consumption (kg of oil equivalent), real domestic credit to
private sector, real exports, real imports and real capital stock;
each in per capita terms. Fig. 1 below shows the trend of the
selected variables in Japan.
To examine the long-run effects between energy consumption
and economic growth, the following Cobb–Douglas production
function is employed in this study:
G ¼ AEα1 K α2 Lα3 eu ð1Þ
where, G is real domestic output; E, K and L denote, energy, capital
and labor respectively. The term refers to technology and e the
error term assumed N(iid). The output is elasticity with respect to
energy consumption, capital and labor is and α3 respectively.
Following to the direction of the Cobb–Douglas model, it is certain
that when technology is restricted to (α1 þ α2 þ α3 ¼ 1) the result
will be constant returns to scale. In the model developed by this
study, technology was allowed to be endogenously determined by
the level of financial development and international trade within
an extended Cobb–Douglas production function. This is because,
financial development promotes economic growth via capital
formation that in turn makes capital more efficient in usage, in
addition to that financial development, encourages FDI inflow and
transfer of superior technology and managerial skills. International
trade, on the other hand, helps technological advancements and
18
16
14
12
10
8
6
65 70 75 80 85 90 95 00 05 10
Year
LEC LFD LY
LK LEX LIM
LTR
Fig. 1. Trends of variables in Japan.
 A.A. Rafindadi, I. Ozturk / Renewable and Sustainable Energy Reviews 54 (2016) 1073–1084 1077

its diffusion. The model can be written as: þ π 5 ln TRt
1 þ π D DUM t þ u2t ð6Þ
α δ where Δ denotes the first different operator, the c0 and d0 are the
AðtÞ ¼ φ U TRðtÞ FðtÞ ð2Þ
drift components, DUM is dummy variable to capture the struc-
where φ is time-invariant constant, TR is an indicator of trade
tural break date, p is the maximum lag length and ut is the usual
openness and F is financial development. Substituting Eq. 2 into
white noise residuals. The procedure of the ARDL bounds testing
Eq. 1:
approach has two steps. The first step is F-test for the joint sig-
GðtÞ ¼ φ:EðtÞδ1 FðtÞδ2 TRðtÞδ3 KðtÞβ LðtÞ1
β ð3Þ nificance of the lagged level variables. The second step is the
estimation of long-run and short-run parameters by using the
Following, Lean and Smyth [22], Rafindadi and Ozturk [36] and
error correction model (ECM). To ensure the convergence of the
also Rafindadi [34,35], the study divide both sides by population
dynamics to the long-run equilibrium, the sign of the coefficient
and obtained each series in per capita terms. However, the impact
for the lagged error correction term (ECMt–1) must be negative and
of labor was left constant. By taking log, the linearized Cobb–
statistically significant. Further, the diagnostic tests comprise the
Douglas production function is:
testing for the serial correlation, functional form, normality, and
ln Gt ¼ β1 þ β2 ln E t þ β3 ln F t þ β4 ln TRt þ β5 ln K t þ β6 ln Lt þ μt the heteroscedasticity [33]. Once the variables are cointegrated for
ð4Þ the long-run relation, then long-run and short-run causality can
be investigated. The existence of a long-run relationship between
where ln Gt , ln Et , ln F t , ln TRt and ln Lt, ln K t represent real GDP,
financial development, economic growth, export, imports, capital
energy consumption, real domestic credit to private sector as a
and energy consumption requires us to detect the direction of
proxy for financial development, real trade openness labor and
causality between the variables by applying the VECM (vector
real capital use respectively, each is transformed into logarithm
error correction method) Granger causality framework. The vector
and expressed in per capita terms. In this paper the study used
error correction method (VECM) is as follows:
three different indicators of trade openness in per capita terms;
2 3 2 3 2 3
real exports, real imports, and real trade (exports plus imports as Δ ln EC t b1 B11;1 B12;1 B13;1 B14;1 B15;1
6 7 6b 7 6B 7
share of GDP ), which are then, estimated as separate equations. 6 Δ ln C t 7 6 2 7 6 21;1 B22;1 B23;1 B24;1 B25;1 7
The term μt is a random error term. The specification also captures 6 7 6 7 6 7
6 Δ ln F t 7 ¼ 6 b3 7 þ 6 B31;1 B32;1 B33;1 B34;1 B35;1 7
6 7 6 7 6 7
the relationship between energy use and economic growth where 6 7 6b 7 6B 7
4 Δ ln Y t 5 4 4 5 4 41;1 B42;1 B43;1 B44;1 B45;1 5
technology takes effect through the financial development and
Δ ln TR b5 B51;1 B52;1 B53;1 B54;1 B55;1
international trade. Prior to testing for cointegration, the statio- 2 3 2 3
narity of each series was checked using the ADF and the PP test Δ ln EC t
1 B11;m B12;m B13;m B14;m B15;m
6 Δ ln C 7 6B 7
with trend and intercept. The study noted that this test cannot 6 t
1 7 6 21;m B22;m B23;m B24;m B25;m 7
6 7 6 7
capture the presence of structural breaks in the series. Following 66 Δ ln F 7 6 B
t
1 7 þ ::: þ 6 31;m B 32;m B 33;m B 34;m B 35;m 7
7
to this shortcomings and after the accomplishment of the ADF and 6 Δ ln Y 7 6B 7
4 t
1 5 4 41;m B42;m B43;m B44;m B45;m 5
the PP test, the study proceed to apply the Zivot and Andrew [43], Δ ln TRt
1 B51;m B52;m B53;m B54;m B55;m
and the Clemente et al. [6] unit root tests to identify the possibility 2 3 2 3 2 3
of an existing structural break within the series. When these tests Δ ln EC t
1 ζ1 μ1t
6 Δ ln C 7 6 7 6μ 7
are accomplished, the Pesaran et al. [32] ARDL bounds testing 6 t
1 7 6 ζ3 7 6 2t 7
6 7 6 7 6 7
approach to cointegration is applied in the determination of the 6 Δ ln F 7 þ 6 ζ 3 7  ðECM t
1 Þ þ 6 μ3t 7 ð7Þ
6 t
1 7 6 7 6 7
6 Δ ln Y 7 6 7 6μ 7
long-run and the short-run dynamics of the variables. This test 4 t
1 5 4 ζ4 5 4 4t 5
according to Inder [15] is found to have serial advantages over the Δ ln TRt
1 ζ5 μ5t
Johansen cointegration techniques. These include, the provision of
consistent results irrespective of the order of the variables in so far where the difference in operator is ð1
LÞ, and the ECM t
1 is
they are within the mix order of I(0) and I(1) or where there is generated from the long-run relation. The long-run causality is
mutual integration. This is in contrast with the Engle and Granger indicated by the significance of the coefficient for the ECM t
1 by
and the Johansen and Juslius [16] approaches. Inder [15] continues using the t-test statistic. The F statistic for the first-differenced
to maintain that the ARDL bounds test could effectively deal with lagged independent variables is used to test the direction of short-
the issue of endogeneity problem and is also best at reporting an run causality between the variables.
unbiased test statistics even if the sample is small. In addition to
that, the ARDL model can efficiently correct for omitted lag vari-
able bias. In order to implement the ARDL bounds testing proce- 4. Results and discussions
dure in this study, Eq. (1) is transformed into the unconditional
error correction model (UECM) as indicated below: To make our investigation robust, the study starts with the
assessment of the unit root test. This is in order to examine the
X
p X
p X
p
Δ ln EC t ¼ c0 þ ci Δ ln EC t
i þ di Δ ln F t
i þ di Δ ln C t
i stationarity properties of the variables. To ensure this, the study
i¼1 i¼1 i¼1 applied the ADF and PP unit root tests. The results of ADF and PP
X
p X
p are presented in Table 1. The results show that all the variables are
þ di Δ ln Y t
i þ di Δ ln TRt
i not stationary at a level. This development suggests the existence
i¼1 i¼1 of a unit root problem within the series thereby, making it
þ π 1 ln EC t
1 þ π 2 ln F t
1 þ π 3 ln C t
1 þ π 4 ln Y t
1 impossible to reject the null hypothesis of the unit root problem.
þ π 5 ln TRt
1 þ π D DUM t þu1t ð5Þ However, after taking the first difference of all the variables, the
series were found to be stationary with intercept and trend. This
X
p X
p X
p
leads us to reject the null hypothesis of the unit root problem. At
Δ ln C t ¼ c0 þ ci Δ ln C t
i þ di Δ ln EC t
i þ di Δ ln F t
i
i¼1 i¼1 i¼1
the end, the study found all variables to be stationary at the first
X
p X
p difference and 1% level of significance. However, it is only the
þ di Δ ln Y t
i þ di Δ ln TRt
i variable of trade openness that is found to be significant at 5%.
i¼1 i¼1 The major problem with ADF and PP unit root tests is that they
þ π 1 ln C t
1 þ π 2 ln EC t
1 þ π 3 ln F t
1 þ π 4 ln Y t
1 do not provide information on the structural breaks position of the
1078 A.A. Rafindadi, I. Ozturk / Renewable and Sustainable Energy Reviews 54 (2016) 1073–1084

series. This development could in actual sense provide an structural breaks dates to be 1999, 1987, 1988, 1990, 1986, 1988 and
ambiguous result if no action is taken. To solve this problem, the 1988. The structural break problems are found within the confines
study applied the Zivot and Andrew [43] unit root test. This test is of the series of electricity consumption, economic growth, finan-
best at accommodating single unknown structural break in the cial development, capital, exports, imports and trade openness
series. The selection of the break date is base on T-statistic and the respectively. However, at the first difference, the variables are
break date is be selected where the evidence is favorable to the found to be stationary. Following this development we conclude
null hypothesis. In this test, the critical values of ADF unit root test that the variables are integrated at I(1).
are used. The results of the test are shown in Table 2, the finding The Zivot and Andrew unit root test accommodates informa-
from that Table shows how all the variables are non-stationary at a tion on a single unknown structural break in the series but ignore
level in the presence of structural breaks. The test indicated the the role of other structural breaks that may exist within the series.
To further investigate and solve this problem of two recurring
Table 1 structural breaks in the series, the Clemente–Montanes–Reyes
Unit Root Analysis.
(1998) test of dual structural breaks is used. The result of this test
Variable ADF unit root test P–P unit root test is indicated in Table 3. The findings from that table shows that in
the presence of two structural breaks at the level, all variables are
T. statistic Prob. value T. statistic Prob. value non-stationary, and there is a problem of unit root in all the
ln Et
1.8304 (1) 0.6752
1.7843 (3) 0.6997
variables in the case of Japan. However, in the presence of two
ln Y t
2.3142 (3) 0.4189 2.2995 (3) 0.4265 structural breaks, all the variables of the model were found to be
ln F t
0.7294 (2) 0.9651
1.4760 (3) 0.8250 stationary at first difference. For this reason, we may conclude that
ln K t
1.8024 (2) 0.6884
1.3119 (6) 0.8737 our series have the same order of integration, and that is I(1).
ln EX t
2.5126 (0) 0.3211
2.6962 (3) 0.2425
In investigating the existence of cointegration among the
ln IM t
2.7341 (1) 0.2881
1.9758 (3) 0.6002
ln TRt
2.2186 (2) 0.4693 2.2549 (3) 0.4500 variables in the presence of structural breaks, this study applied
Δ ln Y t
4.7836 (1)a 0.0017
5.7041 (3)a 0.0058 the ARDL bounds testing approach to cointegration. In addition to
Δ ln Et
4.3590 (1)a 0.0058
5.8956 (3)a 0.0001 that, the AIC is also used in the lag selection exercise. In this
Δ ln F t
4.4072 (1)a 0.0051
6.0785 (3)a 0.0000
analysis, the study found the maximum lag length to be 2. Fol-
Δ ln K t
4.6636 (1)a 0.0024
4.3917 (3)a 0.0052
Δ ln EX t
6.5521 (2)a 0.0000
9.0342 (3)a 0.0000 lowing to this ascertainment, the study proceeds to estimate the F-
Δ ln IM t
4.9639 (1)a 0.0010
6.3812 (3)a 0.0000 statistic, which will confirm the existence of cointegration among
Δ ln TRt
3.6784 (1)b 0.0336
7.2991 (3)a 0.0000 the variables or otherwise. The commonest rule here is, if the
a calculated F-statistic is found to be greater than the critical
Indicates significant at 1% levels of significance. Lag length of variables is
shown in small parentheses. bounds, then we may reject the hypothesis of no cointegration.
b
Indicates significant at 5% levels of significance. Lag length of variables is The result of this analysis is reported in Table 4. The findings of the
shown in small parentheses. Table shows how the model; i.e. the calculated F-statistics to have
exceeded the upper critical bounds, at 1% and 5% levels respec-
tively. This development indicates that we had three co-
Table 2 integrating vectors when electricity consumption, financial
Zivot–Andrews structural break trended unit root test.
development, and capital were used as dependent variables. The
Variable At level At 1st difference same inference is found in imports and trade openness models.
Following to this, the study concludes for the existence of coin-
T-statistic Time break T-statistic Time break
tegration relationship between the variables in the presence of
ln Et
2.335 (1) 1999
6.800 (2)a 1983 structural breaks in the series.
ln Y t
4.485 (1) 1987
5.471 (1)b 2000 The robustness of the long-run relationships is investigated by
ln F t
3.967 (1) 1988
6.684 (1)a 1976 applying Johansen cointegration approach, and the results are
ln K t
4.599 (1) 1990
5.229 (1)b 1992
reported in Table 5. The results show that both the Maximum
ln EX t
4.706 (1) 1986
7.166 (2)a 2004
ln IM t
5.002 (1) 1988
5.886 (1)a 1984 Eigenvalue and Trace Statistics are significant. The null hypothesis
ln TRt
4.939 (1) 1988
6.352 (1)a 2008 of no cointegration is rejected in this respect, suggesting the
a
existence of cointegrating vectors in three models. This confirms
Represents significance at 1%, levels respectively. The lag order is shown in
the presence of a long-run relationship between the variables. This
parenthesis.
b
Represents significance at 5% levels respectively. The lag order is shown in finding is an attestation to the fact that our earlier finding using
parenthesis. the ARDL model on the long run results are robust.

Table 3
Clemente–Montanes–Reyes detrended structural break unit root test.

Variable Innovative outliers Additive outlier

T-statistic TB1 TB2 Decision T-statistic TB1 TB2 Decision

ln EC t
4.188 (2) 1974 1985 Unit Root Exists
6.490 (2)a 1981 1996 Stationary
ln Y t
3.076 (3) 1983 2000 Unit Root Exists
6.110 (3)a 1990 2000 Stationary
ln F t
4.352 (3) 1975 1983 Unit Root Exists
6.834 (3)a 1986 1990 Stationary
ln K t
3.401 (1) 1974 1982 Unit Root Exists
6.026 (3)a 1984 2000 Stationary
ln EX t
4.175 (1) 1986 1998 Unit Root Exists
6.546 (2)a 1986 1989 Stationary
ln IM t
3.080 (3) 1986 2000 Unit Root Exists
7.271 (5)a 1986 1991 Stationary
ln TRt
4.089 (2) 1976 1998 Unit Root Exists
8.401 (2)a 1991 1995 Stationary

a
Indicates significant at 1% level of significance. The lag length of variables is shown in small parentheses.
 A.A. Rafindadi, I. Ozturk / Renewable and Sustainable Energy Reviews 54 (2016) 1073–1084 1079

Table 4
The results of ARDL cointegration test.

Bounds testing to cointegration Diagnostic tests

Estimated models Optimal lag length Structural break F-statistics χ 2NORMAL χ 2ARCH χ 2RESET χ 2SERIAL

F E ðE=Y; F; K; EXÞ 2, 2, 2, 2, 2 1999 7.478a 0.8383 [1]: 0.0567 [1]: 0.8237 [1]: 1.6304
F Y ðY=E; F; K; EXÞ 2, 2, 2, 2, 2 1987 1.652 0.6504 [1]: 0.0090 [2]: 0.0267 [2]: 0.0359
F F ðF=Y; E; K; EXÞ 2, 2, 2, 1, 2 1988 6.991b 7.4470 [1]: 2.0034 [2]: 0.3787 [1]: 0.3966
F K ðK=Y; E; F; EXÞ 2, 2, 2, 2, 2 1990 5.571b 3.5465 [1]: 0.1571 [2]: 0.4171 [1]: 1.5246
F EX ðEX=Y; E; F; KÞ 2, 1, 2, 2, 2 1986 1.925 5.0645 [1]: 1.5098 [1]: 0.0010 [1]: 6.0886
F E ðE=Y; F; K; IMÞ 2, 1, 2, 2, 2, 1999 5.756b 2.6653 [1]: 1.4913 [1]: 0.4437 [1]: 0.4838
F Y ðY=E; F; K; IMÞ 2, 2, 1, 2, 2 1987 1.3682 0.0332 [1]: 0.7103 [1]: 1.8734 [1]: 0.1816
F F ðF=Y; E; K; IMÞ 2, 1, 2, 2, 2 1988 13.7594a 1.2541 [1]: 5.5309 [1]: 2.9821 [4]: 0.5487
F K ðK=Y; E; F; IMÞ 2, 2, 2, 2, 2 1990 5.7221a 0.3980 [4]: 0.8680 [3]: 2.5997 [1]: 0.4327
F IM ðIM=Y; E; F; KÞ 2, 1, 2, 2, 2, 1988 1.9948a 0.6014 [1]: 0.0632 [1]: 0.0759 [1]: 0.5663
F E ðE=Y; F; K; TRÞ 2, 1, 2, 2, 2 1999 5.4261a 0.5313 [1]: 0.5672 [1]: 1.1742 [1]: 0.5304
F Y ðY=E; F; K; TRÞ 2, 2, 2, 2, 2 1987 1.9409 0.2153 [1]: 0.9201 [1]: 0.5040 [1]: 0.7601
F F ðF=Y; E; K; TRÞ 2, 1, 2, 2, 2 1988 7.9616a 1.65404 [1]: 3.5300 [4]: 1.7404 [1]: 1.6573
F K ðK=Y; E; F; TRÞ 2, 2, 2, 2, 2 1990 5.4261c 3.0124 [1]: 0.4815 [1]: 5.8061 [1]: 0.2616
F TR ðTR=Y; E; F; KÞ 2, 1, 2, 2, 2 1988 2.5015 0.5385 [2]: 0.2304 [4]: 1.6662 [1]: 0.7830
Significant level Critical values (T ¼43)#
Lower bounds I(0) Upper bounds I(1)
1% level 6.053 7.458
5% level 4.450 5.560
10% level 3.740 4.780

a
Denotes the significant at 1% levels, respectively. The optimal lag length is determined by AIC. [ ] is the order of diagnostic tests. # Critical values are collected from
Narayan (2005).
b
Denotes the significant at 5% levels, respectively. The optimal lag length is determined by AIC. [ ] is the order of diagnostic tests. # Critical values are collected from
Narayan (2005).
c
Denotes the significant at 10% levels, respectively. The optimal lag length is determined by AIC. [ ] is the order of diagnostic tests. # Critical values are collected from
Narayan (2005).

The long-run results are presented in Table 6, and the findings Table 5
of the study established that financial development has positive Results of Johansen cointegration test.
and significant impact on electricity consumption in Japan. To
support the direction of this claim the study discovered that a 1% Hypothesis Trace Statistic Maximum Eigen Value

increase in financial development will lead to a corresponding Y t ¼ f ðEt ; F t ; K t ; EX t Þ

increase of 0.2429% in electricity demand in Japan keeping other R ¼0 106.1547a 39.4866b
things constant. In another related development that compliments R r1 66.6680a 25.2575
the earlier finding, the study discovered how economic growth in R r2 41.4104 19.5260
R r3 21.8843 15.1901
Japan to be totally reliant on electricity consumption. Specifically, R r4 6.6941 6.6941
the study found the Japanese economic growth prospects to be Y t ¼ f ðEt ; F t ; K t ; IM t Þ
positively and statistically related with electricity consumption. R ¼0 131.1673a 48.3739b
The findings of this study discovered how a 1% increase in eco- R r1 82.7933a 36.5483b
R r2 46.2450b 18.7134
nomic growth will lead to a corresponding increase of 0.5040% in R r3 27.5315b 16.1356
electricity consumption in Japan. Surprisingly, the impact of R r4 11.3959 11.3959
capital on electricity consumption is found to be negative, and it is Y t ¼ f ðEt ; F t ; K t ; T t Þ
statistically significant at 1% level. The result further indicates that R ¼0 113.6845a 39.2150b
R r1 74.4694a 29.5157
a 1% increase in physical capital decreases electricity demand by R r2 44.9533b 23.1358
0.2142% if all other things remain the same. The Japanese exports R r3 21.8179 16.6111
were, on the other hand, found to be positively related with R r4 5.2067 5.2067
electricity demand. The result of the long-run analysis indicates a
Shows significant at 1% levels of significance.
that any 1% increase in the Japanese exports will have a significant b
Shows significant at 5% levels of significance.
impact on electricity demand by a cumulative rise of 0.0921%.
Similar to this line of development, the study further discovered positive and significant relationship with electricity consump-
the existence of positive and significant relationship between tion, but capital is still found to be negatively linked with elec-
imports in Japan and electricity demand in Japan. This finding tricity consumption as the case in the long-run finding. The impact
reveals that a 1% increase in imports will lead to 0.2193% rise in of exports on electricity consumption is positive, but it is statisti-
electricity demand. Similar to that, Trade openness was equally cally insignificant in the short-run. This development is in contrast
discovered to influence the Japanese electricity consumption to the long-run finding. The study also discovered the existence of
positively, and it is statistically significant at 1%. a positive and significant relationship between imports and elec-
The results of the short-run analysis are also reported in the tricity demand in Japan. The association between trade openness
lower level of Table 6. The results indicate that financial devel- and electricity consumption is positive, and it is statistically sig-
opment has positive and significant relationship with electricity nificant. The value of the ECM is found to be negative and statis-
demand. As a result a 1% increase in financial development tically significant. The estimates of exports, imports and trade
increases electricity consumption by 0.2210 in the short-run. models are
0.1650,
0.4279 and
0.2279 respectively. This
Similar to the long-run finding, the study further discovered eco- suggests that short-run deviations toward long-run would be
nomic growth to exhibit a persistent long-run and short-run corrected by 16.50%, 42.79% and 22.79% in the models of exports,
1080 A.A. Rafindadi, I. Ozturk / Renewable and Sustainable Energy Reviews 54 (2016) 1073–1084

Table 6
Long and short runs results.

Dependent variable ¼ ln EC t
Long Run Analysis

Variables Coefficient T-statistic Coefficient T-statistic Coefficient T-statistic

Constant
0.7904
0.5307 1.0630 1.1416 0.7463 0.6172

ln F t 0.2429a 2.9832 0.2145a 5.2765 0.2112a 4.2586
ln Y t 0.5040a 3.2792 0.2007b 1.8243 0.2833b 1.8580
ln K t
0.2142a
2.7787
0.1018c
2.0300
0.1272b
1.9275
ln EX t 0.0921c 2.1352 … … …
ln IM t … … 0.2193a 5.1538 … …
ln TRt … … … … 0.1687a 2.8002
Short-Run Analysis
Variables Coefficient T-statistic Coefficient T-statistic Coefficient T-statistic
Constant
0.0017
0.2986
0.0071
1.1983
0.0071
1.1983
ln F t 0.2210c 2.2522 0.2469a 2.8944 0.2469a 2.8944
ln Y t 0.5840c 2.6074 0.7053a 2.8433 0.7053a 2.8433
ln K t
0.1468b
1.8038
0.2685c
2.3547
0.2685c
2.3547
ln EX t 0.0521 0.8924 … … … …
ln IM t … … 0.2031a 2.7555 … …
ln TRt … … … … 0.2031a 2.7555
ECM t
1
0.1650c
2.1150
0.4279c
2.0929
0.2279c
2.0731
R2 0.57 0.6485 0.6485
F-statistic 9.6648a 13.2854a 13.2854a
D. W 1.5208 1.5412 1.7489
Short Run Diagnostic Tests
Test F-statistic Prob. value F-statistic Prob. value F-statistic Prob. value
χ 2 NORMAL 3.9608 0.0907 0.8459 0.1680 0.1143 0.3282
χ 2 SERIAL 1.9900 0.1523 2.3153 2.8339 2.1153 0.1362
χ 2 ARCH 1.6083 0.3522 0.6510 5.4234 4.0156 0.0483
χ 2 WHITE 0.9394 0.5129 1.2267 1.1495 2.2789 0.0339
χ 2 REMSAY 0.9691 0.3391 2.1242 0.1346 1.2721 0.2117

a
Shows significant at 1% level of significance.
b
Shows significant at 10% level of significance.
c
Shows significant at 5% level of significance.

imports and trade openness respectively. The results of diagnostic 15

tests indicate that the error terms of the short-run model are 10
normally distributed in all models. There is no heteroskedasticity,
5
serial correlation, and also no ARCH problem. The value of the
0
Ramsey reset test shows that the functional form for the short-run
-5
models is well specified.
-10
-15
4.1. Exports model
92 94 96 98 00 02 04 06 08 10 12
CUSUM 5% Significance
In finding the stability of the long-run and short-run para-
meters of exports model, the cumulative sum (CUSUM) and the Fig. 2. (Export model) Plot of cumulative sum of recursive residuals.
cumulative sum of squares (CUSUMsq) are used as proposed by
Brown et al. [4]. The plot of the CUSUM is found to be within the of the model. The direction of the causal relationship between the
line and significant at 5%. However, the plot of the CUSUMsq did variables is helpful in designing comprehensive economic, finan-
not lie within the line after 2001 and is not significant at 5% level cial and trade policies to control energy demand for sustainable
of significance. This indicates the presence of a structural break in economic growth. The results are reported in Table 8. The findings
2001. The imports and trade models show consistent and efficient in that Table reveal the existence of both long and short run causal
parameters of the long-and-short-run as confirmed by the CUSUM relationships. In the long-run, the study discovered the existence
and CUSUMsq in Figs. 2 and 3 for the export model, same stability of bidirectional causality between financial development and
test for CUSUM and CUSUMsq was conducted with respect to the electricity consumption, electricity consumption and capital. Fol-
import and trade models and are presented in Figs. 4 and 5, and lowing to this, the feedback effect was found to exist between
Figs. 6 and 7 respectively. financial development and capital. In another development, the
To confirm the stability, we have applied Chow breakpoint test study found the existence of unidirectional causality running from
that confirmed the absence of no break point over selected period economic growth, exports, imports and trade to electricity con-
(Table 7). This shows that our estimated model is a good fit. sumption. These respective findings confirm the existence of an
economic growth led electricity consumption, exports-led elec-
4.2. The VECM Granger causality analysis tricity consumption, imports-led electricity consumption, and
trade-led electricity consumption in Japan.
The VECM Granger causality test is applied in this study in In the short-run, the relationship between economic growth
order to establish the direction of causality between the variables and electricity consumption is bidirectional. Financial
 A.A. Rafindadi, I. Ozturk / Renewable and Sustainable Energy Reviews 54 (2016) 1073–1084 1081

1.4 15
1.2
1.0 10
0.8 5
0.6
0.4 0
0.2 -5
0.0
-0.2 -10
-0.4
-15
92 94 96 98 00 02 04 06 08 10 12
92 94 96 98 00 02 04 06 08 10 12
CUSUM of Squares 5% Significance

CUSUM 5% Significance
Fig. 3. (Export model) Plot of cumulative sum of squares of recursive residuals.
Fig. 6. (Trade model) Plot of cumulative sum of recursive residuals.

15

10 1.4
1.2
5 1.0
0 0.8
0.6
-5 0.4
0.2
-10
0.0
-15 -0.2
92 94 96 98 00 02 04 06 08 10 12 -0.4
92 94 96 98 00 02 04 06 08 10 12
CUSUM 5% Significance

CUSUM of Squares 5% Significance

Fig. 4. (Import model) Plot of cumulative sum of recursive residuals.
Fig. 7. (Trade model) Plot of cumulative sum of squares of recursive residuals.

1.4
1.2
1.0
0.8
0.6
0.4
0.2
0.0
-0.2
-0.4
92 94 96 98 00 02 04 06
CUSUM of Squares 5% Significance
Fig. 5. (Import model) Plot of cumulative sum of squares of recursive residuals.
development was found to Granger cause economic growth and
capital. In addition to that financial development is also found to
Granger cause electricity consumption in Japan. The feedback
effect was detected between capital and economic growth. Eco-
nomic growth, on the other hand, is Granger-cause of exports.
Import Granger cause electricity consumption, capital, and eco-
nomic growth. Trade openness Granger causes electricity con-
sumption and capital in Japan.
5. Conclusion and policy implications
This paper investigated the relationship between economic
growth and electricity consumption by incorporating financial
development, capital, and trade openness (exports and imports)
using an extended Cobb–Douglas production function. The time
span of the study is 1970–2012 using time series data for the
Japanese economy. In this study, the traditional and structural
break unit root tests were applied before determining the inte-
grating properties of the variables. The cointegration relationship
between the variables was tested using the ARDL bounds testing
approach to cointegration and was further validated using the
Johansen cointegration method. The causality relationship
between the variables was, on the other hand, investigated using
the VECM Granger causality framework. The findings of the study
established that electricity consumption, economic growth,
financial development, capital, and trade openness are coin-
tegrated for the long-run relationship. Following this
Table 7
Chow Forecast Test.
Chow Forecast Test: Forecast from 2001 to 2012
F-statistic 3.6025 Probability 0.3212
Log likelihood ratio 75.6132 Probability 0.0000
08 10 12
development, the study discovered that financial development
stimulates electricity consumption in Japan. Economic growth
adds to electricity demand, but capital declines it. Exports, imports
and trade openness were equally found to create a significant
increase in electricity consumption. In another related develop-
ment, the study detected the existence of feedback effect between
financial development and electricity consumption and the same
inference is noted between capital and economic growth. Eco-
nomic growth, exports, imports, and trade openness were on the
other hand found to Granger-cause electricity consumption
in Japan.
The major distinguishing features of this study with past stu-
dies lies in its ability to uncover the degrees of the impact of each
macroeconomic variable used in this study on the Japanese elec-
tricity consumption amidst the country's level of electricity pre-
dicaments. Following to this, the study discovered that in the long-
run a 1% rise in the financial development prospects of Japan will
exert considerable pressure on the country's electricity con-
sumption by 0.2429%. Additionally, a 0.5040% increase in the
Japanese energy predicaments was also observed to be as a result
of any 1% increase in the country’s economic growth. Similar cases
were found with respect to the Japanese exports and imports. In
these two instances, it was discovered that any 1% increase in
exports and imports in the country will add significant pressure on
the Japanese electricity demand by 0.0921% and 0.2193% respec-
tively. These findings signify that the Trade openness in Japan
affects electricity consumption. Surprisingly, however, the study
discovered that capital declines energy consumption in the
country in both the long-run and the short-run. Similar discoveries
were observed with respect to the short-run dynamic effects of
financial development, economic growth, exports and imports on
the electricity predicaments of Japan. In those relationships the
1082 A.A. Rafindadi, I. Ozturk / Renewable and Sustainable Energy Reviews 54 (2016) 1073–1084

Table 8
VECM Granger causality analysis.

Dependent variable Type of causality

Short Run Long Run

P P P P P
Δ ln Et
1 Δ ln Y t
1 Δ ln F t
1 Δ ln K t
1 Δ ln EX t
1 ECT t
1

a
Δ ln Et – 3.3985 2.2841 1.0507 1.5009
0.0386a
[0.0463] [0.1187] [0.3618] [0.2388] [
2.2109]
Δ ln Y t 13.5611b – 16.1355b 18.7825b 3.0620c –
[0.0000] [0.0000] [0.0000] [0.0579]
Δ ln F t 4.5392a 0.5792 – 2.8311c 0.2067
0.2528c
[0.0252] [0.5663] [0.0743] [0.8143] [
1.7900]
Δ ln K t 2.2345 18.5600b 4.1411a – 1.8410
0.2617b
[0.1244] [0.0000] [0.0225] [0.1756] [
3.1365]
Δ ln EX t 0.8618 2.1180 0.2570 0.3117 – –
[0.4323] [0.1373] [0.7750] [0.7345]
P P P P P
Δ ln Et
1 Δ ln Y t
1 Δ ln F t
1 Δ ln K t
1 Δ ln IM t
1
Δ ln Et – 2.5272c 3.6425a 1.3792 3.5812a
0.6213a
[0.0925] [0.0379] [0.2668] [0.0399] [
2.7600]
Δ ln Y t 11.7378b – 15.9987b 24.8490b 3.6939a –
[0.0000] [0.00000] [0.0000] [0.0337]
Δ ln F t 4.4232a 0.4844 – 4.9821a 2.1598
0.2887a
[0.0204 [0.6206] [0.0133] [0.1324] [
2.0563]
Δ ln K t 3.6540a 10.8970b 5.2871a – 9.8632b
0.1813a
[0.0376] [0.0000] [0.0108] [0.0005] [
2.5214]
Δ ln IM t 3.6596a 3.1892a 0.1326 13.1310b – –
[0.0291] [0.0519] [0.6782] [0.0000]
P P P P P
Δ ln Et
1 Δ ln Y t
1 Δ ln F t
1 Δ ln K t
1 Δ ln TRt
1
Δ ln Et – 2.9231c 1.7828 0.8358 2.7646c
0.1232b
[0.0685] [0.1850] [0.4431] [0.0786] [
5.4563]
Δ ln Y t 12.5353b – 17.1352b 14.9809b 0.6057 –
[0.0000] [0.0000] [0.0000] [0.5506]
Δ ln F t 2.4475 0.4255 – 3.3311a 1.5401
0.2631c
[0.1030] [0.6572] [0.0489] [0.2303] [
1.8802]
Δ ln K t 2.6010c 12.5826b 4.4651a – 4.8000a
0.2493b
[0.0903] [0.0000] [0.0205] [0.0153] [
3.2602]
Δ ln TRt 5.8989b 0.4242 0.3945 2.0421 – –
[0.0057] [0.6571] [0.6766] [0.1431]

a
Denotes the significance at the 5% level.
b
Denotes the significance at the 1% level.
c
Denotes the significance at the 10% level.

statistical indicators reveals that a 1% rise in the Japanese financial
development prospects, economic growth, export, and import will
lead to 0.2210%; 0.5840%; 0.0521% and 0.2031% short-run pressure
on the country’s existing electricity position respectively. The most
nostalgic discovery in this study was the finding on the positions
of the error correction model in Table 6, in that table our findings
established how the values of the error correction model indicated
slow adjustment prospects towards the long-run equilibrium in
response to shocks in industrial productions in the Japanese
export sector, import, and the financial development sectors. The
study attributed this to the rolling outage that applies to most of
the energy-intensive production entities in the country and series
of other macroeconomic shocks. These situations further suggest
that productivity is greatly affected in Japan. This development
justified the reason behind the continued fall in revenue genera-
tion in Japan, necessitated by a significant fall in export and other
economic productivities. In addition to that, the wide existing
trade deficits, dwindling value of the Japanese Yen, massive
unemployment and the resultant decline in economic growth
could all be attributed to the persistent economic shocks that was
further aggravated by poor electricity supply that is required to
sustain steady production activities in Japan and hence reduce
unemployment.
The implications of these findings to the Japanese economy is
that it will continue to lead to the shrinkage of the country’s
economic productivities. This is because efficient electricity supply
means competitive industrial output and vice-versa. In addition to
that, if this situation continued to the long-run it will pose tre-
mendous effects on the country’s macroeconomic development
prospects by constricting the possibilities of economic growth in
both the long-run and the short-run. This is because as industrial
productivities are threatened by insufficient and inefficient energy
supply, the phenomenon will undoubtedly lead to the decline in
competitive industrial wherewithal. In addition to that, the huge
cost used in generating electricity via the use of fossil fuel lead to
high electricity tariffs, and this significantly lead to the rise in the
cost of productivities. Following this development, it is essential to
point out that an ailing and inefficient energy system breeds
loopholes in a country’s planning prospects. With reference to this
development electricity conservation policies currently in force in
Japan will significantly affect the rate and the thriving of all for-
mulated plans towards placing the country back on the path of
sustainable economic growth particularly in a situation where the
country host industrial outlets that are energy intensive. From the
foregoing analysis, and with reference to the findings of this study
it was discovered that energy consumption Granger cause eco-
nomic growth and that export, imports, and financial development
were also found to lead to an increase in the country’s electricity
consumption. This means that any significant reduction in efficient
and effective electricity supply in Japan, it will automatically
impact negatively on this key economic activities which will in
turn affect economic growth prospects of the country. To amelio-
rate the nostalgic energy predicament issues in Japan, and place
the Japanese economy towards a sustainable path of affluence
 A.A. Rafindadi, I. Ozturk / Renewable and Sustainable Energy Reviews 54 (2016) 1073–1084
already attained, we argue for strong commitment on the side of
policy makers to embrace alternative long-run and short-run
measures that are aimed at prioritizing huge investment into the
country’s renewable energy sector.
The impacts of renewable energy to Japan can be seen from the
successful consolidative economic gains and the provisions of
energy security attained by the Germans' renewable energy sys-
tem. For instance, Rafindadi [36] reported that Germany is cur-
rently the world's largest operator of non-hydro renewable energy
capacity in the world and the world's second-largest generator of
wind energy. According to the author, nuclear power in Germany
currently accounts for only 17.7% of the nation’s electricity supply
in 2011, which is very minimal when compared with 22.4% in
2010. Rafindadi [36] continue to point out that, the proportion of
electricity generated from renewable energy in Germany rose from
6.3% in 2000 to more than 25% in the initial half of 2012, thus
generating 65.7 GW and that is equivalent to what 20 nuclear
reactors could generate. This development according to the author
provided significant energy and environmental security for the
Germans'. From this lesson, we argue that Japan should borrow
from the German initiative considering the incessant historical
earthquakes that besieged the country in recent years. Com-
plementing the established findings of Rafindadi [36], Marques
and Fuinhas [26] in their study also supported the need for a
significant boost of renewable energy system if sustainable and
meaningful economic growth is to be achieved in a country. In
addition to that, this study is of the believe that if this initiative is
adopted in Japan it will greatly help in solving the high electricity
demand by industrial and household consumers and will also help
in reducing the low capacity of crude oil storage which the country
suffers from. Similar to this, the attendant volatility in fossil fuel
prices and its epileptic supply from regions that are incessantly
affected by European sanctions such as Iran and the Arab springs
that cumulatively add cost to the Japanese energy prospects could
all be eliminated.
We argue in this study that the Fukushima energy disaster
should be seenas a lesson and challenge towards green energy
revolution and revitalization in Japan. To ensure this, our study
recommends heavy investment but competitive renewable energy
system and should be the goal orientation with respect to all
energy initiative in the country. However, it may be burdensome
to achieve this line of development unilaterally and overnight.
Following to this, and in order to ensure the curtailment of cost
and time, we argue for the need of Japan to open its doors for the
wide influx of FDI strictly within its renewable energy sector and
to proceed with the invention of massive indigenous industrial
outlets that promote the manufacture of renewable energy com-
ponents in the country. In addition to that, collective and sup-
portive effort should also be provided by the country’s energy
authorities and intending stakeholders.
Apart from the above long-run policy options energy autho-
rities in Japan could also embark on a penalty-based approach
aimed at encouraging prudential electricity use in the country.
This can be ensured by making the government promulgate a
policy for goods and services tax (GST). This development was
recently launched by the Malaysian government in its 2014 bud-
get. In that instance as reported by Bekhet and Ivy-Yap [2] the
authors pointed out that beginning from 1 April, 2015, Malaysian
electricity authorities will be charging 6% on every 201st unit of
electricity and above that is consumed by household in a month.
This policy is aimed at making electricity cost dearer to a house-
hold that consume more than 200 units of electricity per month in
Malaysia. This is expected to amplify the cost of wasteful elec-
tricity consumption. This development if implemented in Japan
will not only palliate the Japanese’s energy predicaments in the
contemporary time but will equally ensure a balanced energy
1083
production and usage, environmental quality attainment through
a significant reduction in energy emission from the fossil fuel
currently used in generating power. The earlier initiative will
equally help in costs saving, conserve energy and at the same time
serving to sustain the welfare position of the Japanese citizens
through reduction in carbon dioxide emission, and significant
reduction if not total elimination of rolling outage. While ensuring
the accomplishment of these policy options, the study believe the
foregoing arguments will assist with the simultaneous satisfaction
of efficient and balanced energy production and usage by con-
sumers. Finally we argue that Japan should not afford to see a
continued decline of its economic growth prospects as this will
continue to impede on its manufacturing and other productive
outlets that are the cardinal pillars of its economic growth. In
essence going entirely green in energy is the current best option
for the country.
References
[1] Al-Mulali U, Che Sab CNB. The impact of energy consumption and CO2 emis-
sion on the economic and financial development in 19 selected countries.
Renew Sustain Energy Rev 2012;16(7):4365–9.
[2] Bekhet HA, Ivy-Yap LL. Highlighting energy policies and strategies for the
residential sector in Malaysia. Int J Energy Econ Policy 2014;4:448–56.
[3] Bildirici ME, Bakirtas T, Kayikci Fazıl. Economic growth and electricity con-
sumption: autoregressive distributed lag analysis. J Energy South Afr 2012;23
(4):29–45.
[4] Brown RL, Durbin J, Evans JM. Techniques for testing the constancy of
regression relations over time. J R Stat Soc B 1975;37:149–92.
[5] Cheng BS. Energy consumption, employment and causality in japan: a mul-
tivariate approach. Indian Econ Rev 1998;33(1):19–29.
[6] Clemente J, Antonio M, Marcelo R. Testing for a unit root in variables with a
double change in the mean. Econ Lett 1998;59:175–82.
[7] Economic Watch. China and Japan's economic data does not impress; 2014.
〈http://www.economywatch.com/features/China-and-Japans-Economic-Data-
Does-Not-Impress.12-08-14.html〉.
[8] EIA (2014) Analyisis, 〈http://www.eia.gov/countries/cab.cfm?fips ¼ ja〉.
[9] Elliott RJ, Sun P, Xu Q. Energy distribution and economic growth: an empirical
test for China. Energy Econ 2015;48:24–31.
[10] Erol U, Yu ESH. On the causal relationship between energy and income for
industrialized countries. J Energy Dev 1988;13(1):113–22.
[11] Filger S. Global economic financial crisis; 2008. [online] Available at: 〈http://
www.globaleconomiccrisis.com/blog/2010/6/archives/category/global-eco
nomic-crisis〉.
[12] Fukushige M, Yamawaki H. The relationship between an electricity supply
ceiling and economic growth: an application of disequilibrium modeling to
Taiwan. J Asian Econ 2015;36:14–23.
[13] IEA. Key World Energy Statistics; 2013. 〈http://www.iea.org/publications/free
publications/〉.
[14] IHS. Global insight, Japan: Japan—interim annual forecast. 〈http://www.ihs.
com〉; 2011 [retrieved 9.02.15].
[15] Inder B. Estimating long-run relationship in economics: a comparison of dif-
ferent approaches. J Econ 1993;57:53–68.
[16] Johansen S, Juselius K. Maximum likelihood estimation and inference on
cointegration with application to the demand for money. Oxf Bull Econ Stat
1990;52:169–210.
[17] Japan, Ministry of Economy, Trade and Industry, Japan’s Nuclear Emergency—
Update, April 6, 2011 available at: http://www.jtuc-rengo.org/information/
data/japans_nuclear_emergency.pdf [retrieved 30.1.15].
[18] Karanfil F, Li Y. Electricity consumption and economic growth: exploring
panel-specific differences. Energy Policy 2015;82:264–77.
[19] Kim YS. Electricity consumption and economic development: are countries
converging to a common trend? Energy Econ 2015;49:192–202.
[20] Kyophilavong P, Shahbaz M, Anwar S, Masood S. The energy-growth nexus in
Thailand: does trade openness boost up energy consumption? Renew Sustain
Energy Rev 2015;46:265–74.
[21] Kwon S, Cho SH, Roberts RK, Kim T, Yu TE. Effects of changes in electricity
price on electricity demand and resulting effects on manufacturing output. In:
Proceedings of 2015 annual meeting. Southern Agricultural Economics Asso-
ciation. Atlanta, Georgia (No. 196850); January 31–February 3, 2015.
[22] Lean HH, Smyth R. On the dynamics of aggregate output, electricity con-
sumption and exports in Malaysia: evidence from multivariate Granger
causality tests. Appl. Energy 2010;87(6):1963–71.
[23] Lee CC. The causality relationship between energy consumption and GDP in
G-11 countries revisited. Energy Policy 2006;34:1086–93.
[24] Marques AC, Fuinhas JA. The role of Portuguese electricity generation regimes
and industrial production. Renew Sustain Energy Rev 2015;43:321–30.
1084 A.A. Rafindadi, I. Ozturk / Renewable and Sustainable Energy Reviews 54 (2016) 1073–1084
[25] Mouton M. The Philippine electricity sector reform and the urban question:
how metro Manila's utility is tackling urban poverty. Energy Policy
2015;78:225–34.
[26] Nanto DK, Cooper W, Donnelly JM, Renée JR. Japan's 2011 Earthquake and
Tsunami: economic effects and implications for the United States. Congres-
sional research service 7-5700; www.crs.gov. Research paper no. R41702;
2011.
[27] Narayan PK, Prasad A. Electricity consumption-real GDP causality nexus:
evidence from a bootstrapped causality test for 30 OECD countries. Energy
Policy 2008;36:910–8.
[28] Nazemi A, Mashayekhi M. Competitiveness assessment of Iran’s restructured
electricity market. Energy Econ 2015;49:308–16.
[29] Omri A. An international literature survey on energy-economic growth nexus:
evidence from country-specific studies. Renew Sustain Energy Rev
2014;38:951–8.
[30] Omri A, Daly S, Rault C, Chaibi A. Financial development, environmental
quality, trade and economic growth: what causes what in MENA countries.
Energy Econ 2015;48:242–52.
[31] Ozturk I. Literature survey on energy-growth nexus. Energy Policy
2010;38:340–9.
[32] Pesaran MH, Shin Y, Smith RJ. Bounds testing approaches to the analysis of
level relationships. J Appl Econ 2001;16:289–326.
[33] Pesaran B, Pesaran MH. Time series econometrics using Microfit 5.0. 1st edi-
tion. England: Oxford University Press; 2009.
[34] Rafindadi AA. Econometric prediction on the effects of financial development
and trade openness on the German Energy consumption: a startling new
revelation from the data set. Int J Energy Econ Policy 2015;5:182–96.
[35] Rafindadi AA. Could the expanding economic growth and trade openness of
the United Kingdom pose a threat to its existing energy predicaments? Int
J Energy Econ Policy 2015;5:121–37.
[36] Rafindadi, Ozturk. Natural gas consumption and economic growth nexus: is
the 10th Malaysian plan attainable within the limits of its resource? Renew
Sustain Energy Rev 2015;49:1221–32.
[37] Sami J. Multivariate cointegration and causality between exports, electricity
consumption and real income per capita: recent evidence from Japan. Int
J Energy Econ Policy 2011;3(1):59–68.
[38] Soytas U, Sari R. Energy consumption and GDP: causality relationship in G-7
countries and emerging markets. Energy Economics 2003;25:33–7.
[39] Sun S, Anwar S. Electricity consumption, industrial production and entrepre-
neurship in Singapore. Energy Policy 2015;77:70–8.
[40] Tang CF, Lai YW, Ozturk I. How stable is the export-led growth hypothesis?
Evidence from Asia's Four Little Dragons Econ Model 2015;44:229–35.
[41] The International Business Outlook. Japan's economic outlook: 7 themes to
watch in 2014. 〈http://www.ibtimes.com/japans-economic-outlook-7-themes-
watch-2014-1519012〉; 2014 [retrieved 23.01.15].
[42] World Bank. World development indicators. Washington, D.C: World Bank;
2012.
[43] Zivot E, Andrews D. Further evidence of great crash, the oil-price shock, and
unit root hypothesis. J Bus Econ Stat 1992;10:251–70.