Linkage between Wage and Price Inflation in Japan

Yoichi Ueno
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Yoichi Ueno: Bank of Japan

No 24-E-7, Bank of Japan Working Paper Series from Bank of Japan

Abstract: This paper investigates changes in the linkage between wages and prices in Japan by using a dynamic factor model of disaggregated wages and prices with heteroscedasticity- and autocorrelation-robust inference. The empirical results show that the model is better at identifying the underlying trends in wage and price inflation than models using only aggregate data. In addition, the trend component of services price inflation is the best indicator to gauge the underlying trend in price inflation among indicators examined in this paper. Further, wages and prices decoupled around 1998, but they have recoupled to some extent in the post-COVID-19 era. Lastly, the volatility of the common trend component of wage and price inflation determines the strength of the linkage between wages and prices, and it closely tracks an indicator which shows importance on price inflation when firms revise wages in negotiations.

Keywords: Price Inflation; Wage Inflation; Unobserved Components Model; Factor Model (search for similar items in EconPapers)
JEL-codes: E31 E37 J31 (search for similar items in EconPapers)
Date: 2024-06-28
New Economics Papers: this item is included in nep-lma and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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