Japan's inflation under global inflation synchronization

Abstract

In this paper, we analyze the effects of domestic and global factors on Japan's consumer price inflation, inflation expectations and nominal wages from the late 1990s to the post-pandemic period, using structural vector autoregression (SVAR) models with short- and long-run zero and sign restrictions. We find that global shocks, including global supply, demand, and monetary policy shocks, account for about 40 % and 30 % of variance in four-quarter-ahead headline (excluding fresh food) and core inflation, respectively, and the importance of global shocks increases when post-pandemic data are included. Historical decompositions show that various types of global shocks, including downward cost pressure due to globalization reflected in positive global supply shocks, had persistently pushed down Japan’s consumer price inflation until the late 2010s. Subsequently, their contribution turned positive, both global supply and demand shocks significantly pushing up inflation, especially in the high-inflation phase after the pandemic. In addition, we find that services prices and nominal wages were also pushed up significantly by global shocks in the post-pandemic period.