Can IT be Japan's savior?

This paper constructs a multi-sector model to take explicit account of the very sharp change in the relative price between non-IT and IT goods. The model is calibrated to the Japanese economy, and its solution path from 1990 on is compared to Japan's macroeconomic performance in the 1990s. Compared to the one-sector analysis of Japan in the 1990s [Hayashi, F., Prescott, E.C., 2002. The 1990s in Japan: A lost decade. Rev. Econ. Dynam. 5, 206-235], our model does slightly better or just as well in accounting for Japan's output slump and does worse in accounting for the capital-output ratio. We also show that, to revive a 2% long-term growth in per capita GDP, Japan needs to direct 10% of private total hours to the IT sector.