Shrinkage of regional differences in the cost‐of‐living index in Japan

This study aims to clarify the existence of regional differences and the impact of the 2008 Lehman (Brothers) shock, the collapse of a major U.S. securities firm that triggered the global financial crisis, on these differences based on the regional cost‐of‐living index (RCLI) in Japan. We apply a methodology developed by Kakwani and Hill, which is an axiomatic approach for constructing the multilateral spatial cost‐of‐living indices, to compare the price levels of households between regions of Japan. The results show, overall, a shrinkage of regional differences after the Lehman shock. However, the impact of the Lehman shock on the cost of living varies from region to region. In Japan, the Lehman shock lowered the RCLI in urban areas rather than rural areas. This finding implies that urban areas in Japan are more susceptible to macro shocks, which reduce regional differences with rural areas. Furthermore, based on the results of the cost‐of‐living index by group commodity, we offer a policy implication for the fundamental elimination of regional differences between Japan's urban and rural areas. This would encourage, for example, an increase in the cost of living in rural areas through increased public transport investment and costs, an accompanying increase in rent of housing in surrounding areas and an increase in communication costs owing to the spread of high‐speed internet services, such as 5G.