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Linkage between Wage and Price Inflation in Japan

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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
    as

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    File URL: https://www.boj.or.jp/en/research/wps_rev/wps_2024/data/wp24e07.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Price Inflation; Wage Inflation; Unobserved Components Model; Factor Model;
    All these keywords.

    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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