The Phillips Curve and Cost Pass-Through in Japan: Summary of the Second Workshop on "Issues Surrounding Price Developments during the COVID-19 Pandemic"

On May 30, 2022, the second workshop on "Issues Surrounding Price Developments during the COVID-19 Pandemic," entitled "The Phillips Curve and Cost Pass-Through in Japan," was held at the Bank of Japan's Head Office. The workshop featured lively discussions involving experts and scholars in economics and empirical analysis on the impact on prices of the recent increase in cost-push pressures triggered by high raw material costs and the weak yen, on the various factors affecting price formation from a somewhat longer-term perspective, and on what to make of these developments in light of changes in economic structure as a result of the pandemic. Session 1 focused on the characteristics of the recent pass-through of cost-push pressures to consumer prices, comparing current developments in Japan with those abroad and in the past. The session featured an analysis showing that in Japan, too, where the pass-through until recently was limited, the pass-through rate may be increasing, especially at the intermediate demand stage, and, based on this analysis, discussion of the recent price-setting behavior of firms, etc. Session 2 started with the presentation of an analysis of the impact of various factors, such as cost-push pressures and inflation expectations, on inflation based on the Phillips curve framework. The presentation further focused on the mechanism of inflation expectations formation, wage developments, and other issues, which are thought to have a significant impact on price formation in the long run, and featured discussion on the implications of the findings presented. Session 3 consisted of a panel discussion on what to expect with regard to future inflation developments taking structural changes due to the pandemic into account. First, it was pointed out that while the recent increase in cost-push pressures was expected to push up prices in the immediate future, from a somewhat longer-run perspective it was necessary to keep an eye on the downward pressure on the economy and prices from the downward push on real incomes. In this context, it was suggested that recent price hikes, especially for daily necessities, would have a greater impact on lower-income households. Second, in terms of whether the current cost-push inflation would help to achieve future price stability, the view was that the key issues were (1) whether firms' price-setting stance was gradually changing and this stance was becoming ingrained in society, and (2) whether, for this to happen, wages were going to rise firmly and household incomes were maintained.