A0644
Title: Linkage between wage and price inflation in Japan
Authors: Yoichi Ueno - Bank of Japan (Japan) [presenting]
Abstract: Changes in the linkage between wages and prices in Japan are investigated using a dynamic factor model of disaggregated wages and prices with heteroscedasticity- and autocorrelation-robust inference. The empirical results show that the model is better at identifying the underlying trends in wage and price inflation than models using only aggregate data. In addition, the trend component of service price inflation is the best indicator to gauge the underlying trend in price inflation among the indicators examined. Further, wages and prices decoupled around 1998, but they have recoupled to some extent in the post-COVID-19 era. Lastly, the volatility of the common trend component of wage and price inflation determines the strength of the linkage between wages and prices, and it closely tracks an indicator which shows the importance of price inflation when firms revise wages in negotiations.
