Mechanism of wage-price determination in Japan and deflation prospect (in Japanese)

Shunichiro Ushijima

ESRI Discussion paper series from Economic and Social Research Institute (ESRI)

Abstract: Recently the role of wages in deflation process has been rarely taken as a serious study subject in Japan. However, looking at prices in the economy as a whole from the cost side, wages are the biggest cost factor and, therefore, the development in wages should have a close relationship with the development in prices. This study focuses on the wage determination in Japan to identify factors which strongly influence price development but have not been captured well by traditional Philips curve approaches. In Japan, a general trend in wage development for the next one year period is determined in spring every year. This characteristic in wage determination should have an important implication in the price determination. In this study, wage equation is formulated based on a wage contract model embodying special features in the Japanese wage determination process, and consumer price equation is formulated in a consistent way in which wage equation is derived. Both wage and consumer price equations are estimated by OLS method. Estimated wage and price equations verifies that a general trend in wages and therefore consumer prices over the next one year period is determined during the spring months based on information available at that moment. Furthermore, the analysis based on wage and price equations indicate that 1) the fundamental factor which brought about deflation is a long lasting stagnation after the burst of the bubble, and 2) consumer price deflation is likely to end in the near future if the current economic recovery continues.

Pages: 66 pages
Date: 2004-03
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