Understanding Inflation Dynamics of the Japanese Economy : An Approach Integrating Microeconomics Behaviors and Aggregate Fluctuations

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Low inflation has been a fact of economic life in many countries over the last two decades. This tendency is particularly clear for the Japanese economy : the inflation rate has been staying below zero since the latter half of the 1990s. The purpose of this project is to study the causes and implications of such a change in the inflation process. The key idea is that a decline in the inflation rate at the macro level should be closely related to changes in firms' microeconomics behaviors. Our main finding is that Japanese firms change their prices more frequently than U. S. and European firms, and that the frequency of price adjustments tends to increase over the last ten years. This finding indicates that, in Japan, prices are less sticky at the micro level, contradicting the high price stickiness at the macro level that has been found by previous studies regarding the slope of the Phillips curve in Japan. We have provided empirical evidence suggesting that the inconsistency between micro and macro price stickiness stems from strategic complementarities in price setting of Japanese firms.