ICHIRO OTANI *
One of the most controversial economic issues at present in Japan is the problem of inflation. During the decade of the 1960s and the first three years of the 1970s, the annual rate of inflation fluctuated between – 2 and 3 per cent in terms of the wholesale price index and between 3 and 8 per cent in terms of the consumer price index. However, in 1973 the rate of price increases accelerated to an annual rate of 16 per cent in terms of wholesale prices and to 21 per cent in terms of consumer prices.
These events have occasioned lively discussions, particularly about the main factors causing inflation and about remedies for curtailing it. The possibility of introducing incomes policies has also been attracting the attention of public officials, academicians, and businessmen. Many have argued that the vicious circle created by increases in wages and prices must be stopped by incomes policies, but such arguments have not yet gained wide support from economists and government officials. In any attempt to combat inflation, however, the relationship between money wages, labor productivity, and prices must be closely scrutinized. As a first step, an understanding of the mechanism of price and wage determination is necessary, as well as an assessment of the effects of various factors on the rate of increase in prices and wages.
The purpose of this paper is twofold: (1) to review critically some of the econometric studies on money wages and prices in Japan after World War II and to summarize the major findings; (2) to construct, on the basis of these studies, a prototype model describing the relationships that determine money wages and prices in Japan. Some implications are drawn about possible incomes and demand management policies that may be necessary to bring the rate of inflation down to a more tolerable level.
Section I of this paper contains a critical review of existing studies;1 Section II presents a prototype model and discusses its implications for controlling inflation. A summary of the major findings appears in Section III, and the Appendix contains a short note on econometric problems encountered in some of the studies surveyed.
APPENDIX: Notes on Econometric Problems
Below is a brief summary of econometric problems encountered in the studies under consideration.
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Mr. Otani, an economist in the Asian Department, is a graduate of the University of California at Berkeley and the University of Minnesota. In addition to colleagues in the Fund, the author is grateful to Professor Ronald Findlay of Columbia University and to Professor Yusuke Onitsuka of Osaka University for their useful comments on the paper.
Econometric studies surveyed include the Economic Planning Agency (1971), Eguchi (1970), Minami (1973), Minami and Ono (1971, 1972, 1973), Saito (1972, 1973), Spitäller (1971, 1972), Toyoda (1972), and Watanabe (1966). Non-econometric studies reviewed include the Committee on Prices, Income, and Productivity (1972), Minami (1968, 1970a, 1970b, 1972), Ohkawa (1973), Shirai (1971), and Takasuka (1963).
An exception to this process is found in the public sector, where there would be some time lag between price adjustments and wage increases.
See John T. Dunlop (1966, pp. 74–94). He cites the factors influencing (determining) bargain power as follows:
“1. Tastes of workers and employers, with respect to wages and manhours bought and sold…. Institutional factors, such as property rights, and wage-hour legislation….
“2. Market conditions, especially the degree and type of competition in the labor market, the product market, the market for complementary factors of production, and the market for competitive factors of production.…
“3. ‘Pure’ bargaining power: ability to get favorable bargains, apart from market conditions: (a) the extent of knowledge of tastes and market conditions influencing the behavior of the other party to the contract; and (b) intrinsic ‘toughness’; the ability to get the desired result with a given amount of energy and unpleasantness.”
The regression result referred to above is as follows:
where ΔWt = Wt – Wt–4 and ΔPt = Pt+1 – Pt–1. See Watanabe (1966, p. 41). There is no economic theory that justifies the lag structure in the profit ratio variable (P).
This prototype model should not be regarded as the best model of wage-price determination; it is a model that represents the main characteristics of the econometric models surveyed in the paper.
Since most of the equations in this model are overidentified, simultaneous estimation methods can be applied to estimate the structural parameters.
Two points must be made concerning this variable
When the adjustment coefficient in the adaptive expectation hypothesis is very high, the expected rate of changes in prices and wages can be replaced by the actual rate of changes in these variables.
U is the ratio of job applicants to job offers. The assumed values, except the value of
One of the implications of the negative gap (about –6 per cent) between the rate of inflation and the increase in the unit labor costs is that there must have been a profit squeeze in the period 1967–72. The actual data on ratios of profits to sales in corporate sectors suggest that the average ratio declined by about 4 per cent in 1967–72, compared with 1962–66.
The assumed values are estimated by the actual data during the period 1967–72. Therefore, it is implicitly assumed that the steady-state changes in
It is interesting to note that the traditional wage guideline for limiting money wages to productivity gains does not hold in the case of Japan. This result is attributed to the dual structural relationship in the wage price determination mechanism, as well as to different elasticities of inflation variables with respect to changes in wage rates.
Implicit in this assumption is that the balance of payments position is in equilibrium from a long-run point of view.
This rate of unemployment was the average of annual data for 1965–72. Therefore, it is assumed that the government can introduce monetary and fiscal policies that will achieve a rate of unemployment of 0.8.