Comment on “Micro Price Dynamics during Japan's Lost Decades”

• Published date: 01 January 2014
• DOI: http://doi.org/10.1111/aepr.12046
• Author: Tack Yun
• Date: 01 January 2014

Comment on “Micro Price Dynamics during

Japan’s Lost Decades”

Tack YUN†

Seoul National University

JEL codes: E3, E31, E5

I think that Sudo et al. (2014) present some very interesting features of Japanese micro

price dynamics that can be differentiated from the earlier work of Higo and Saito (2007)

and Abe and Tonogi (2010). In particular, Sudoet al.’s work would be very valuable from

a general perspective when it could uncover the potential systematic effects of deflation

on changes in the behavior of disaggregated prices and consumption expenditure. In that

regard, my comment begins with Sudo et al.’s five empirical findings. First,posted prices

in Japan are ten times as flexible as those in the US scanner data. Second, regular prices

are as flexible as those in the USA and Euro area. Third,the frequencies and sizes of pr ice

changes substantially differ across different products. Fourth, the importance of tempo-

rary sales in the consumption expenditure of households has risen during Japan’s lost

decades. Fifth, the frequencies of both upward movements in regular prices and sales are

significantly correlated with aggregate labor market conditions, whereas other compo-

nents are not. Given these results, I would like to address several issues that might

deserve some discussion.

What happened in 1995 in Japan? Sudo et al.’s (2014) Figures 1, 2, and 5 raise the

possibility that 1995 could be the threshold time point for the inflation rate, the number

of products sold, and estimates of the price elasticity. If 1995 is an important turning

point in the pricing and purchasing behavior of firms and households, it might be

worthwhile to see if there is any expectations channel through which private agents can

coordinate their beliefs about the future economic environment and reflect these coordi-

nated beliefs into their decision making.

Do we need to distinguish between the source and the propagation mechanism of the

deflation period (that might be relevant for micro pricing behaviors of firms)? Sudo

et al. (2014) discuss the argument that the onset of the Japanese deflation might be

attributed to the decline in productivity or the growth slowdown. However, it might be

good to make a distinction between the source and the propagation mechanism of the

deflation period in the following sense. Around 1995, households started to be sensitive

to prices for their consumption choices, while firms began to use temporary sales that

seemed to be more effective because of increases in the elasticity of prices in households’

demands. The greater effectiveness of temporary sales gave firms less incentives

to change their long-term prices named by reference prices. As the deflation period

†Correspondence: TackYun, Department of Economics, Seoul National University, #1 Gwanak-ro,

Gwanak-gu, Seoul 151-742, Korea. Email: tackyun@snu.ac.kr

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doi: 10.1111/aepr.12046 Asian Economic Policy Review (2014) 9, 67–68

© 2014 The Author

Asian Economic Policy Review © 2014 Japan Center for Economic Research 67