Price Setting in Japan: Evidence from CPI Micro Data

This paper investigates the price-setting behavior in Japan by using the CPI micro data in the Retail Price Survey from 1989 to 2003. We establish the four facts as follows. First, the frequency of price changes for goods is high while that for services is low. The frequency of price changes for goods has increased during the 1990s while that for services has greatly decreased. Second, many items have a downward sloping hazard function while some have the flexible-type or the Taylor-type hazard function. Third, in most of the categories in the CPI, a decline in the frequency of price changes has contributed to the drop in the CPI inflation rate since the 1990s while the size of price changes has remained roughly unchanged. Fourth, the heterogeneity in the frequency of price changes acrosscategories and its evolution are strongly influenced by the differences in the share of labor costs in the production costs and changes in the firm's price strategy regarding temporary sales.