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What Caused the Pandemic-Era Inflation?: Application of the Bernanke-Blanchard Model to Japan


February 16, 2024
Koji Nakamura*1
Shogo Nakano*2
Mitsuhiro Osada*3
Hiroki Yamamoto*4


Many countries have experienced high inflation since the COVID-19 pandemic. Japan is no exception, albeit lower levels than those of other countries. This paper analyzes the direct and indirect effects of product-market and labor-market shocks on prices and nominal wages using the model proposed by Bernanke and Blanchard (2023). With minor modifications to incorporate the dual structure of the Japanese labor market, the model achieved a good fit to actual Japanese data. The main findings are as follows. First, the high inflation that Japan has experienced in the wake of the pandemic can be explained mostly by product-market specific shocks such as energy and food price spikes, but not by labor market tightness. This result is similar to the U.S. results presented in the Bernanke-Blanchard paper, which is somewhat surprising given the differences between Japan and the U.S. in labor market structure and firms' price- and wage-setting behavior. Second, Japan's low inflation relative to the U.S. during this period can be explained by a difference in the initial conditions of the underlying inflation trend before the pandemic and a difference in the degree of labor market tightness. Lastly, the model suggests that the impact on inflation of changes in labor market tightness was weaker in Japan.

JEL classification
E31, E24, E52

Inflation, Wages, Labor Market, Inflation Expectation, COVID-19

This paper is part of a joint project with Ben Bernanke, Olivier Blanchard, and economists from various central banks. The authors thank Ben Bernanke, Olivier Blanchard, and all other participants in the project for valuable discussions and Wataru Hirata, Sohei Kaihatsu, Jouchi Nakajima, Takashi Nakazawa, Teppei Nagano, and Hitoshi Sasaki for their helpful comments on this paper. Any remaining errors are the authors' own. The views expressed in this paper are those of the authors and do not necessarily represent those of the Bank of Japan, nor do they represent the views of other central banks.

  1. *1Financial System and Bank Examination Department, Bank of Japan
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  2. *2Monetary Affairs Department, Bank of Japan
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  3. *3Monetary Affairs Department, Bank of Japan
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  4. *4Monetary Affairs Department, Bank of Japan
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