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Linkage between Wage and Price Inflation in Japan


June 28, 2024
Yoichi Ueno*


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.

JEL classification
E31, E37, J31

Price Inflation; Wage Inflation; Unobserved Components Model; Factor Model

The author is grateful to Kosuke Aoki, Takeo Hoshi, Shigenori Shiratsuka, Toyoichiro Shirota, and colleagues at the Bank of Japan for comments and discussions. Any remaining errors are the author's own. Views expressed in the paper are those of the author and do not necessarily reflect those of the Bank of Japan.

  1. *Research and Statistics Department (currently Nagoya Branch)
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