Comment on “Product Downsizing and Hidden Price Increases: Evidence from Japan's Deflationary Period”

• Date: 01 January 2014
• DOI: http://doi.org/10.1111/aepr.12049
• Published date: 01 January 2014
• Author: Kiyohiko G. Nishimura

Comment on “Product Downsizing and

Hidden Price Increases: Evidence from

Japan’s Deflationary Period”

Kiyohiko G. NISHIMURA†

University of Tokyo

JEL codes: E31, C43

Imai and Watanabe (2014) meticulously examine possible downward biases in the Japa-

nese consumer price index (CPI). In the past, we have been bombarded by arguments for

the existence of upward biases in the Japanese CPI, mostly based on the prejudgment

that the Japanese CPI has almost the same bias as its US counterparts. Imai and

Watanabe make it clear that the bias in the CPI is not uniform among countries and

economies.

To my limited knowledge as a former practitioner of monetary policy, Imai and

Watanabe are the first to show that Japan’s prices behave differently from those in the

USA, in two ways. First, although mostly focused on supermarket items, Imai and

Watanabe are able to show that deflation in the CPI for this category in the past several

years is in fact associated with quality downgrades, so that the quality-adjusted prices did

not fall as much as the official CPI suggested. Although there are methodological differ-

ences between this paper (using the geometric average of prices) and the CPI (using a

consumption-basket weighted average of “representative” products’ prices), Imai and

Watanabe’s price index“declined by about 16% in 2000–2012, with the rate of deflation

per year being 1.3%, which is comparable to the figures for the correspondingitems in the

official CPI.”In contrast, the corresponding quality-adjusted price index (per-unit price

taking account of downsizing) fell far less than the unadjusted price index and the corre-

sponding CPI component. This suggests a downward bias in the official CPI component.

Second, this downward bias is not inconsequential because Japanese consumers base

their consumption on quality-adjusted prices, not the quality-unadjusted price tags.

Failure to recognize this downward bias may lead to a false assessment of inflationary

dynamics. In fact, Japanese consumers are keenly aware that downsizing implies an

increasing price, in a sharp contrast with their American counterparts, who tend to be

more sensitive to the price tag (quality-unadjusted price) than the per unit price

(quality-adjusted price). To put this differently,Japanese consumers are more rational (in

an economic sense) than the US consumers studied by Gourville and Koehler (2004).

Moreover, the Japanese consumers seem more to be more than simply rational: the

majority of Japanese consumers appreciate upsizing and detest downsizing indepen-

dently of the per-unit price. This may be interpreted as an appreciation of these firms’

†Correspondence: Kiyohiko G. Nishimura, Faculty of Economics, University of Tokyo, 7-3-1

Hongo, Bunkyo-Ku,Tokyo 113-0033, Japan. Email: nisimura@e.u-tokyo.ac.jp

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doi: 10.1111/aepr.12049 Asian Economic Policy Review (2014) 9, 92–93

© 2014 The Author

Asian Economic Policy Review © 2014 Japan Center for Economic Research

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