Professor Ion DOBRE, PhD Adriana ALEXANDRU, PhD Candidate The Bucharest Academy of Economic Studies ESTIMATING THE SIZE OF THE SHADOW ECONOMY IN JAPAN: A STRUCTURAL MODEL WITH LATENT VARIABLES Abstract. The current study adopts an approach to the Japanese case that is based on the theory of unobservable variables. This methodology involves the estimation of structural models (MIMIC) which analyses a set of causes of the shadow economy while simultaneously taking into account its influence upon a series of indicators. The proposed model permits the determination of a relative evolution over time of the size of the shadow economy, which requires the calibration of the model with an exogenous estimation in order to obtain real values. The exogenous estimation is obtained by a monetary method based on a money demand function. The results show that the size of shadow economy measures between 8-11% of GDP in the period 1980-2008, and demonstrate that the shadow economy is significantly influenced by the tax burden and its components (direct tax, indirect tax and social contributions). Key words: shadow economy, MIMIC model, Japan. JEL classification : C22, C51, C87, E26 I. INTRODUCTION The shadow economy is one of the causes of the inefficient functioning of the goods and labour markets. It introduces a distortion of competition within countries and among States. It is clear that the SE not only has negative effects on the economic system but also generates positive ones. Shadow economy creates an extra added value that can be spent in the official economy. Schneider and Enste (2000) state that at least two thirds of the income earned in the SE is immediately spent in the official economy, thus having a positive effect on the latter. In this study, we want to respond to the following questions: What are the dynamics and size of the Japanese SE (as percentage of the official GDP) in the