How Fast Are Prices in Japan Falling?

Abstract

The consumer price inflation rate in Japan has been below zero since the mid-1990s. However, despite the presence of a substantial output gap, the rate of deflation has been much smaller than that observed in the United States during the Great Depression. Given this, doubts have been raised regarding the accuracy of Japan’s official inflation estimates. Against this background, the purpose of this paper is to investigate to what extent estimates of the inflation rate depend on the methodology adopted. Our specific focus is on how inflation estimates depend on the method of outlet, product, and price sampling employed. For the analysis, we use daily scanner data on prices and quantities for all products sold at about 200 supermarkets over the last ten years. We regard this dataset as the“universe”and send out (virtual) price collectors to conduct sampling following more than sixty different sampling rules. We find that the officially released outcome can be reproduced when employing a sampling rule similar to the one adopted by the Statistics Bureau. However, we obtain numbers quite different from the official ones when we employ different rules. The largest rate of deflation we find using a particular rule is about 1 percent per year, which is twice as large as the official number, suggesting the presence of substantial upward-bias in the official inflation rate. Nonetheless, our results show that the rate of deflation over the last decade is still small relative to that in the United States during the Great Depression, indicating that Japan’s deflation is moderate.