Micro Price Dynamics during Japan's Lost Decades

• DOI: http://doi.org/10.1111/aepr.12044
• Author: Kota Watanabe,Kozo Ueda,Nao Sudo
• Published date: 01 January 2014
• Date: 01 January 2014

Micro Price Dynamics during Japan’s

Lost Decades

Nao SUDO,1Kozo UEDA2† and Kota WATANABE3

1Bank of Japan, 2Waseda University and 3Chuo University

We study micro price dynamics and their macroeconomic implications using daily scanner data

from 1988 to 2013. We provide five facts. First, posted prices in Japan are ten times as flexible as

those in the US scanner data. Second, regular prices are almost as flexible as those in the USA and

Euro area. Third, the heterogeneity of frequency and size of price change across products is sizable

and maintained throughout the sample period. Fourth, during Japan’s lost decades, temporary

sales have played an increasingly important role in households’ consumption expenditure. Fifth,

the frequency of upward regular price revisions and the frequency of sales are significantly corre-

lated with the macroeconomic environment, in particular indicators associated with a labor

market, while other components of price changes are not.

Key words: deflation, lost decade, price stickiness, regular price, scanner data, temporary sale

JEL codes: E3, E31, E5

1. Introduction

Since the asset price bubble bust in the early 1990s, Japan has gone through the so-called

lost decades, experiencing prolonged stagnation and very low rates of inflation (see

Figure 1). To investigate its background, in this paper, we study micro price dynamics at

the retail shop and product level. We employ daily scanner or point of sales (POS) data

from 1988 to 2013 covering over six billion records,and examine how firms’ price setting

has changed over these 20 years. We report similarities and differences in micro price

dynamics between Japan and the rest of the world, and draw implications for economic

theory as well as for policy.

This paper provides five facts. First, posted prices in Japan are ten times as flexible as

those in the US scanner data. The daily frequency of price changes records about 15% of

the products. Second, regular prices are as flexible as those in the USA and Euro area.

The monthly frequency is around 20%. Third, the heterogeneity of price dynamics across

products is substantial, and such heterogeneity is maintained. Even in an era of deflation,

prices have risen for a large number of products and fallen for other products. This

asymmetry is observed particularly in the tail end. That is, the magnitude of price drops

The authors thank the Editors of the Asian Economic Policy Review (AEPR), Tsutomu Watanabe,

Kosuke Aoki, Tack Yun, and conference and seminar participants at the Asian Economic Policy

Review (AEPR) Conference, CIGS and Waseda University for useful comments. The views

expressed in this paper are those of the authors and do not necessarily reflect the official views of

the Bank of Japan. All errors are our own.

†Correspondence: Kozo Ueda, Waseda University, 1-6-1 Nishi-Waseda, Shinjuku-ku, Tokyo 169-

8050, Japan. Email: kozo.ueda@waseda.jp

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doi: 10.1111/aepr.12044 Asian Economic Policy Review (2014) 9, 44–64

© 2014 The Authors

Asian Economic Policy Review © 2014 Japan Center for Economic Research

44

is greater than that of price jumps for the products that exhibited vast changes in their

regular prices during the sample period. Fourth, temporary sales have played an increas-

ing important role in households’ consumption goods expenditures. They have become

more frequent, and the ratio of sales sold at the sale price to total sales has increased in

recent years. Alongside the number (variety) of products, the price elasticity of consum-

ers’ demand has also increased. Fifth, the frequency of upward regular price revisions

and the frequency of sales are significantly correlated with the macroeconomic environ-

ment, including the indicators of the labor market, while other components of price

changes are not. The last two facts may imply the possibility that worsened labor condi-

tions for households during the prolonged recessions caused them to go bargain

hunting. This raised the price elasticity, and by observing this, retail shops raised the fre-

quency of temporary sales.

As for the micro price dynamics, Bils and Klenow’s (2004) work is the seminal

empirical paper that studies the case of the USA. Klenow and Kryvtsov (2008) and

Nakamura and Steinsson (2008) conduct further detailed analyses. Good surveys are

conducted by Mackowiak and Smets (2009), Klenow and Malin (2011), and Nakamura

and Steinsson (2013), although Japan’s case is not discussed in detail.

Japan’s micro price dynamics have been studied by the Bank of Japan (2000), Higo

and Saita (2007), Ikeda and Nishioka (2007), Mizuno et al. (2010), Abe and Tonogi

(2010), and Watanabe and Watanabe (2013), among others. Our closest and comple-

mentary work is Abe and Tonogi (2010), who employ the same POS data as ours,

although our dataset is longer than theirs, including the most recent 7 years. In addition,

the two papers differ in terms of the sales filter, and the fact that we explore the relation-

ship between micro price dynamics and the macroeconomy.

–6

–4

–2

0

2

4

6

Annual Inflation Rate

90.1.1 95.1.1 00.1.1 05.1.1 10.1.1

Date

POS

CPI (Grocery)

Figure 1 CPI and POS-CPI. CPI, consumer price index; POS, point of sales.

Notes: The POS is obtained from the POS data. CPI(g rocery) representsthe CPI price index of the

same item category as the POS data. For details, see Section 2.3.

Nao Sudo et al.Micro Price Dynamics in Japan

© 2014 The Authors

Asian Economic Policy Review © 2014 Japan Center for Economic Research 45