Sectoral Price Dynamics in Japan: A Threshold Approach

Abstract

This paper focuses on the real – as opposed to the monetary – side of the economy to explain price dynamics in Japan between 1981 and 2001. We use a panel industry data set to examine the impact of institutional and structural factors on the heterogeneous price dynamics in 10 manufacturing sectors. Although the evolution of unit labor costs may seem to be the driving force of these price dynamics, our analysis underlines the importance of the increasingly competitive environment, as captured by rising import penetration. Along with the decline of bargaining power of the workforce, this is a key factor underlying the deflationary pressures that characterized Japanese manufacturing industries in the 1990s.