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Price Setting in Japan:

Evidence from CPI Micro Data

August 2007
Masahiro Higo*1
Yumi Saita*2

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Abstract

This paper investigates the price-setting behavior in Japan by using the CPI micro data in the Retail Price Survey from 1989 to 2003. We establish the four facts as follows. First, the frequency of price changes for goods is high while that for services is low. The frequency of price changes for goods has increased during the 1990s while that for services has greatly decreased. Second, many items have a downward sloping hazard function while some have the flexible-type or the Taylor-type hazard function. Third, in most of the categories in the CPI, a decline in the frequency of price changes has contributed to the drop in the CPI inflation rate since the 1990s while the size of price changes has remained roughly unchanged. Fourth, the heterogeneity in the frequency of price changes across categories and its evolution are strongly influenced by the differences in the share of labor costs in the production costs and changes in the firm's price strategy regarding temporary sales.

Keyword:
Consumer Price Index, Price-setting, Price stickiness, Frequency of price changes, Hazard functions, Time-dependent pricing, State-dependent pricing

JEL classifications: E31, D40, C41

We would like to thank Ken Ariga, John Leahy, Kazuko Kano and participants at the conference "Economic Development in Japan Since the 1990s", "Monetary Policy Workshop" and "Inflation Dynamics in Japan, US and EU" for helpful comments and discussions. We also would like to thank Kosuke Aoki, Andrew Levin, Makoto Shimizu and staff members at the Bank of Japan. We are grateful to Statistics Bureau, Ministry of Internal Affairs and Communications for providing us with the data. We are grateful to Kenji Nishizaki, Izumi Takagawa, Koji Nakamura, Chie Arai, Rie Yamaoka, Ayako Kouju, and Sawako Hagiwara for research assistance. The views expressed in this paper are those of the authors and do not necessarily reflect those of the Bank of Japan or the Research and Statistics Department.

  • *1   Research and Statistics Dept., Bank of Japan
    E-mail: masahiro.higo@boj.or.jp
  • *2   Research and Statistics Dept., Bank of Japan
    E-mail: yumi.saita@boj.or.jp

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