100Introduction
INADA, Yoshihisa
The year 2022 was a historic year in which attention was focused on the virtuous
cycle between prices and wages.
During the global financial crisis known as the Lehman Shock, both nominal and real wages fell due to the substantial expansion of the supply-demandgap, and the two did not diverge. During the recovery process after the COVID19 pandemic, nominal wages rose only moderately, and the decline in real wages
expanded due to the price hikes that exceeded them.
To clarify the situation during this period, Figure 2-0-1 shows the movements of the Core CPI and the import price index (in both contract currency andJPY terms) during the Lehman shock period and after the COVID-19 pandemic.
In both periods, the surge in crude oil prices led to a sharp increase inimport prices. During the Lehman shock period, the import price index incontract currency terms peaked in July 2008 (+34.7% YoY), while the importprice index in JPY terms peaked in August 2008 (+27.2% YoY). However, dueto the rapid appreciation of the JPY in the exchange rate, the Core CPI turned
downward in January 2009. During the recovery process after the COVID-19
pandemic, on the other hand, the import price index in contract currency terms
peaked in November 2021 (+34.0%), while the import price index in JPY terms
60.0

49.2

50.0
40.0 34.7
30.0
20.0

27.2

34.0

10.0

5.0
4.0
3.0
2.0
1.0

0.0

0.0

-10.0

-1.0

-20.0

-2.0

-40.0

-3.0

08M01
08M07
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09M07
10M01
10M07
11M01
11M07
12M01
12M07
13M01
13M07
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14M07
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15M07
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17M07
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18M07
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20M01
20M07
21M01
21M07
22M01
22M07
23M01

-30.0

Contract Currency Based Import Price Index: Left Axis
JPY-based Import Price Index: Left Axis
Core Consumer Price Index: Right Axis

Figure 2-0-1

Contract Currency-Based Import Price Index, JPY-Based Import
Price Index, and Core CPI: YoY (%)

Source: Author’s calculations based on the Bank of Japan’s “Domestic corporate goods price index” and theMinistry of Internal Affairs and Communications’ “National Consumer Price Index”

101
peaked in July 2022 (+49.2%). During this period, the yen depreciated rapidly
against the U.S. dollar from 114.13 yen to 136.63 yen, so the peak of the yenbased import price index was delayed by eight months relative to the contract
currency-based index. With a time lag, import price inflation propagated todomestic corporate prices (peak in December 2022) and was passed on to consumer prices (peak in January 2023). As a result, real wages in Q1 2023 declined
YoY for the fourth consecutive quarter. This rapid deterioration in the income
environment drew national attention to the need for wage increases and to thevirtuous cycle between prices and wages. Chapter 2, Section 1 presents the theoretical and empirical frames of the price-wage virtuous cycle. First, in order for
wages to rise sustainably, it is fundamental to first increase the level of activity inthe economy as a whole before raising prices. For this to happen, strong growth
in private demand, mainly household consumption and private capital investment, is indispensable. Second, an increase in labor productivity is essential forwages to rise, the key to which is the expansion of production facilities throughcapital investment.
Japan’s capital equipment growth has lacked momentum. However, supported by the accommodative financial environment that has prevailed over thepast decade, the performance of large companies in particular has improved,and capital investment has remained strong. The key will be for this to spreadto small and medium-sized enterprises (SMEs), leading to a further increase incapital equipment and productivity in the macroeconomy as a whole. The sourceof robust capital investment will be sustained growth in household consumption.
Wage increases are indispensable for this purpose.
A virtuous cycle between prices and wages is a mechanism by which thedemand and supply sides of the macroeconomy mutually exert a positive influence on each other. In Japan, capital investment is currently growing against
the backdrop of a labor shortage and the digital transformation (DX) accompanying improvements in artificial intelligence (AI). This situation, coupled witha recovery in consumption following the COVID-19 pandemic, should continue
to generate sustained increases in productivity and wages, creating a virtuous
cycle between prices and wages. In addition, the creation of high-value-addedproducts and the premiumization of value-added products are important whenconsidering the improvement of productivity.