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Linkage between Wage and Price Inflation in Japan

Author

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  • Yoichi Ueno

    (Bank of Japan)

Abstract

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.

Suggested Citation

  • Yoichi Ueno, 2024. "Linkage between Wage and Price Inflation in Japan," Bank of Japan Working Paper Series 24-E-7, Bank of Japan.
    • Handle: RePEc:boj:bojwps:wp24e07
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    References listed on IDEAS

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    Cited by:

    1. Fukunaga, Ichiro & Kido, Yosuke & Suita, Kotaro, 2025. "Japan's inflation under global inflation synchronization," Journal of the Japanese and International Economies, Elsevier, vol. 77(C).
    2. Yosuke Kido & Kotaro Suita, 2025. "Labor Cost Passthrough: Evidence from Japanese Long-term Subnational Data," Bank of Japan Working Paper Series 25-E-5, Bank of Japan.
    3. Ryuichiro Hirano & Yutaro Takano & Kosuke Takatomi, 2026. "What Drives Trend Inflation in Japan? : A Trend-Cycle BVAR Decomposition Approach," Bank of Japan Working Paper Series 26-E-1, Bank of Japan.
    4. Ichiro Fukunaga & Yoshihiko Hogen & Yoichi Ueno, 2024. "Japan's Economy and Prices over the Past 25 Years: Past Discussions and Recent Issues," Bank of Japan Working Paper Series 24-E-14, Bank of Japan.
    5. Takuji Kondo & Yuki Takahashi & Kosuke Takatomi, 2026. "Households' Wage Growth Expectations Formation: The Linkage with Price Inflation Expectations," Bank of Japan Working Paper Series 26-E-9, Bank of Japan.
    6. Ichiro Fukunaga & Yoshihiko Hogen & Yojiro Ito & Kenji Kanai & Satoshi Tsuchida, 2024. "Potential Growth in Japan: Issues on Its Relationship with Prices and Wages," Bank of Japan Working Paper Series 24-E-16, Bank of Japan.

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    More about this item

    Keywords

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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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