Comments on “Is Downward Wage Flexibility the Primary Factor of Japan's Prolonged Deflation?”

• DOI: http://doi.org/10.1111/aepr.12057
• Author: Kenn Ariga
• Date: 01 January 2014
• Published date: 01 January 2014

Comments on “Is Downward Wage

Flexibility the Primary Factor of Japan’s

Prolonged Deflation?”

Kenn ARIGA†

Kyoto University

JEL codes: J60, J30

Kuroda and Yamamoto (2014) review and then add their own contributions to the issues

surrounding wage adjustments during the last two decades of deflation in Japan. In the

first part of their paper, wage flexibility during the last two decades is critically examined.

In the latter part of their paper, Kuroda and Yamamoto ask and seek to answer the ques-

tion stated in the title of their paper, namely, is downward wage flexibility the primary

factor of Japan’s prolonged deflation. Kuroda andYamamoto find that by the late 1990s,

(nominal) wage became downward flexible, whereas they dismiss the possibility that

wage flexibility is responsible for Japan’s deflation.

My comments are focused on two major points of Kuroda andYamamoto: that wage

flexibility after 1997–1998 indeed saved the Japanese economy from suffering higher

unemployment, and that wage flexibility is not responsible for the deflation.

Should wage flexibility take the credit for mitigating the impact of negative shocks on the

unemployment rate? I applaud Kuroda and Yamamoto for their work on nominal wage

rigidity, and I concur with them that nominal wage rigidity probably played an impor-

tant role in the deep recession of 1997–1998. I also find their work on wage flexibility

(after 1998) a valuable contribution. On the other hand, I am not convinced that

wage flexibility should take credit for mitigating the impact of negative shocks on

unemployment.

For one thing, a low unemployment rate and a small Okun’s coefficient are perma-

nent features of the postwar Japanese labor market1; they are not limited to the deflation

period. It strikes me as odd that nominal wage flexibility should take credit for this per-

manent feature. Surely, nominal wage flexibility was irrelevant for Japan until the early

1990s when the economy sustained a sizable inflation rate. Kuroda and Yamamoto

perhaps want to rely upon real wage flexibility for the earlier periods. If so, they need a

different approach to examine its role.

Kuroda and Yamamoto’s model based upon nominal wage flexibility is not necessar-

ily wrong, but misplaced when it is invoked as the major factor accountingfor mitigating

the impact of cyclical fluctuations on unemployment in Japan. The wage decline in the

last two decades is due almost entirely to bonus cuts, which is an adjustment in the divi-

sion of the joint surplus, not changes in the price of labor service. My own view is that

†Correspondence: Kenn Ariga, Institute of Economic Research, Kyoto University, Yoshida

Honmachi, Sakyoku, Kyoto606-8501, Japan. Email: ar iga@kier.kyoto-u.ac.jp

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doi: 10.1111/aepr.12057 Asian Economic Policy Review (2014) 9, 159–160

© 2014 The Author

Asian Economic Policy Review © 2014 Japan Center for Economic Research 159