An Empirical Analysis of Price Stickiness and Price Revision Behavior in Japan Using Micro CPI Data

After the collapse of the asset price bubble, especially over the period of declining prices of goods and services from the latter 1990s until recently, it is said that certain Japanese firms have been working to stimulate demand by active price adjustment. Nevertheless, over the same period, inflation persistence has been observed from the year-on-year percent changes in the Consumer Price Index (CPI). How can we interpret this micro and macro information consistently? Motivated by this question, this paper applies a Generalized Dynamic Factor Model to individual CPI item data to examine if it is possible to identify any representative price revision patterns, and if so, to investigate their basic features. Our findings indicate that in Japan there is a highly representative common component among the item data which means there is the high degree of consistency in the timing of price revisions that is a distinctive feature of Japan, in comparison with the U.S. and the euro area. Also, the common component has the feature of a long period of time between shocks and price reactions. Furthermore, our findings indicate that Japanese price revisions tend to be implemented in specific months rather than having any fixed period between shocks and subsequent price revisions. Finally, comparative analyses dividing the 25 years of time series data from 1980 to 2005 into two terms indicate that in recent years price stickiness has been lowering for goods. However, they also indicate that price stickiness has been heightening for services, and the overall price stickiness has not been weakening. This suggests that the increasingly active price adjustment behavior revealed at the microeconomic level may be limited to certain goods only.