Import Penetration and Consumer Prices

This paper shows that changes in international competitiveness played a significant role in creating the deflationary pressure in Japan from 1980 to 2001. Applying Blanchard and Quah's (1989) SVAR technique to Dornbusch, Fischer, and Samuelson's (1977) classical comparative advantage model, we break down Japan's inflation rate of the consumer prices into three kinds of structural shocks: comparative advantage shocks, global productivity shocks, and cyclical demand shocks. The breakdown results tell us that the Japanese economy had been exposed to severe international competition since 1994, especially from the Asian economies. Japan's loss of international competitiveness had exerted continuous downward pressure on the consumer prices and deflationary pressure strengthened significantly at the very end of the 20th century.