Comment on “Why Has Japan Failed to Escape from Deflation?”

• Published date: 01 January 2018
• DOI: http://doi.org/10.1111/aepr.12198
• Date: 01 January 2018

Comment on “Why Has Japan Failed to

Escape from Deflation?”

Ippei FUJIWARA†

Keio University

JEL codes: E31, E5

Accepted: 11 September 2017

Understanding the price dynamics is always at the heart of studies on monetary policy.

If prices are flexible, there is no need for monetary policy as a stabilization tool. If not,

central banks should offer some nominal anchor so that welfare costs stemming from

relative price dispersion should be reduced. Watanabe and Watanabe (2018) conduct

careful analyses using micro data. Two main conclusions are: a simple menu cost

model can explain the price developments in Japan well in that “there is a negative

correlation between trend inflation and the share of items whose rate of price change

is near zero,”

1

and the “inflation norm”is too low in Japan.

Watanabe and Watanabe provide comprehensive empirical facts to support these

two conclusions. It also merits attention that the observed empirical regularities are repli-

cated with simulations using a simple menu cost model. Structural interpretations of the

empirical findings are offered albeit indirectly via model simulation. Not only do Wata-

nabe and Watanabe offer convincing facts in understanding the Japanese economy from

the view point of positive analysis, but also the findings in their paper have an immedi-

ate policy implication: It is not easy for Japan to attain an inflation target of 2%. Papers

with important facts and significant policy implications are always good and highly

appreciated. Watanabe and Watanabe’s paper is one of these good papers. Thus, I do

not have any particular comments to oppose their main conclusions. Let me comment

on what we do not know from the data, and the policy implication.

We do not know the markups in individual goods. In their menu cost model, nom-

inal rigidities are favored as the way to explain price developments in Japan. This con-

clusion is mainly supported by the analyses in Sections 2.2 and 2.3 about the flattening

of the reduced-form Phillips curve.

However, we still cannot conclude that this less clearer relationship between infla-

tion and unemployment rates is as a result of higher nominal rigidities possibly due to

menu costs, since we cannot observe marginal costs. The relationship between inflation

and unemployment rates can be just a reduced-form one. In the language of the New

Keynesian model, unemployment or the output gap must be structurally related to

markups. Otherwise, a causal argument is not possible.

†Correspondence: Ippei Fujiwara, Faculty of Economics, Keio University, 2-25-45 Mita, Minato-

ku, Tokyo 108-8345, Japan. Email: ippei.fujiwara@keio.jp

42 © 2018 Japan Center for Economic Research

doi: 10.1111/aepr.12198 Asian Economic Policy Review (2018) 13, 42–43