Abstract
Many economists dismiss the role of positive supply shocks as a cause of Japan’s deflation. Indeed, they sometimes attribute the long delay in Japan’s recovery to the mistaken view that Japan’s deflation reflects an acceleration of technological progress. Whatever the current situation in Japan, however, economic history certainly suggests that technological progress can go hand in hand with general deflation. Conducting a VAR analysis using very detailed information about the components of Japan’s consumer price index, this paper finds that short-run shocks to Japan’s relative price structure persist in the long run. Given this finding, it is possible to conclude that such shocks are real in origin and reflect technological change. As no effort has yet been completed to show the full extent to which technological change is driving short-run relative price change in Japan compared with other factors, and the full extent to which relative price changes are driving aggregate price change compared with other factors, the policy implications of these findings are unclear. What is clear is that it is a mistake to dismiss out of hand the possibility that technological shocks are playing an important role among other forces in Japan’s current deflation.
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Notes
Hayami has never gone so far to maintain that all deflation is supply side in origin. In addition to supply–side shocks, he has also allowed that there is a “lack of demand” (Mainichi Shimbun, January 27, 2003) and that related to this “problems in the banking sector have impaired Japan’s credit creation mechanism” (Jiji Shimbun, November 23, 2002).
Seasonal effects have been muted by using two alternative methods: (1) year–over–year monthly changes; and (2) X–12 ARIMA with constant and level effects. Seasonal adjustment of Japan’s CPI is necessary because, unlike the United States, CPI seasonal adjustment is done by Japan’s statistical agencies only at the most aggregate level.
A money supply term is also included as part of this analysis.
Unit roots have been tested for using Augmented Dickey–Fuller and Ng–Perron. These tests reject the null unit–root hypothesis for all variables used in this analysis except average price change.
The analysis here has also been conducted with decisions on lag lengths and the inclusion or exclusion of linear and quadratic terms based on the Akaike Information Criterion. While many of the details of the analysis change dramatically (in particular the length of the lags), the conclusions of the analysis are in no significant way different from what is found when the Schwartz Information Criterion is used. This entire analysis has also been done on data seasonally adjusted by X–12–ARIMA without substantially altering the findings.
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Daehaeng Kim provided unusually helpful research assistance and advice with this research. Michael Bordo, provided excellent comments.
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Saxonhouse, G. Good deflation/bad deflation and Japanese economic recovery. IEEP 2, 201–218 (2005). https://doi.org/10.1007/s10368-005-0035-z
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DOI: https://doi.org/10.1007/s10368-005-0035-z