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Why Has Japan Failed to Escape from Deflation?

Author

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  • Kota Watanabe

    (Canon Institute for Global Studies(CIGS) and University of Tokyo)

  • Tsutomu Watanabe

    (Graduate School of Economics, University of Tokyo)

Abstract

Japan has failed to escape from deflation despite extraordinary monetary policy easing over the past four years. Monetary easing undoubtedly stimulated aggregate demand, leading to an improvement in the output gap. However, since the Phillips curve was almost flat, prices hardly reacted. Against this background, the key question is why prices were so sticky. To examine this, we employ sectoral price data for Japan and seven other countries including the United States, and use these to compare the shape of the price change distribution. Our main finding is that Japan differs significantly from the other countries in that the mode of the distribution is very close to zero for Japan, while it is near 2 percent for other countries. This suggests that whereas in the United States and other countries the "default" is for firms to raise prices by about 2 percent each year, in Japan the default is that, as a result of prolonged deflation, firms keep prices unchanged.

Suggested Citation

  • Kota Watanabe & Tsutomu Watanabe, 2017. "Why Has Japan Failed to Escape from Deflation?," UTokyo Price Project Working Paper Series 078, University of Tokyo, Graduate School of Economics.
    • Handle: RePEc:upd:utppwp:078
    as

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    References listed on IDEAS

    as
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    More about this item

    Keywords

    deflation; price stickiness; Phillips curve; inflation expectations; inflation norms; quantitative easing; menu cost models; sectoral price data;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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