Dolores Anne Sanchez, University of Hawaii at Manoa

Abstract

This study evaluates Japan’s inflation between 1972 and 2003 based on empirical estimates of canonical and hybrid New Keynesian Phillips curves. While a small number of studies have looked at Japan’s inflation in this context, none present results for the canonical model that is the focus of this study. We draw several important conclusions from our results. First, the influences on Japan's inflation path are similar to those found in U.S. studies under one of the models. Second, labor's income share per man hour and the Hodrick- Prescott filtered output gap imply firms go 3 to 4 quarters between price adjustments. In addition, the impact of the output gap or real wages on inflation is comparable to that of recent estimates of Japan’s inflation based on traditional Phillips curves. Finally, when the parameters are tested for significance and structural breaks, results suggest that Japan's economy had significant structural breaks in 1996, near the beginning of Japan's deflationary period.

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