Interindustry effects of productivity growth in Japan: 1960-2000

Combining conventional sectoral growth accounting and the static open input-output price model, we analyze the sources of growth of product prices in Japan during the period 1960-2000. Using the input-output framework, we take into account not only the effects of factor costs and productivity within a sector, but also their impacts outside of the sector. We find that Japan's deflation in the 1990s was characterized by low growth of wage rates, low productivity growth, and a low rate of return on capital. Until 1990, productivity improvements compensated for factor cost pressures on output price, especially the rapid growth of labor cost. In contrast, during the 1990s, decreasing rates of return on capital, not productivity improvements, canceled out the inflationary effect of wage growth.