Japan's deflation: the role of wage costs

Satoshi Urasawa

Applied Economics Letters, 2014, vol. 21, issue 11, 742-746

Abstract: Is weak demand pressure alone sufficient to explain Japan's long-standing deflation? The empirical evidence, based on a structural VAR model consisting of productivity, wage costs and prices, provides the robust facts for understanding Japan's deflation. It suggests that sluggish wage growth since the mid-1990s, along with productivity recovery from the collapse of the Japanese asset price bubble, contributed to the persistence of deflation, while weak demand pressure had a large negative implication for Japan's inflation. Going forward, the result implies that the translation of productivity gains into adequate wage growth, in addition to boosting demand, is important to help bring a definitive end to Japan's deflation.

Date: 2014
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DOI: 10.1080/13504851.2014.887184

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