Japan's post-2020 inflation: Upstream surges, restrained downstream pass-through
Bank of Japan researchers investigated Japan's price pass-through dynamics during the 2020-2025 inflationary period using Final Demand-Intermediate Demand Price Indexes. Their study reveals larger upstream price increases but more restrained downstream pass-through compared to the United States.
Upstream pressures, downstream resistance
The study found that Japan experienced substantial variation in price increases across production stages during the post-2020 inflationary episode, a pattern less pronounced in the United States.
At upstream stages, Japan recorded larger price increases, particularly for goods such as energy and raw materials.
Conversely, at downstream stages, Japan showed smaller price increases across a wide range of goods-producing sectors compared to the United States.
Despite this relative restraint, the evidence suggests that goods price pass-through by Japanese firms became more active across many sectors relative to the pre-2020 period, even while remaining relatively subdued compared to the US overall.
These findings are based on an analysis of Final Demand-Intermediate Demand (FD-ID) Price Indexes from 2020 to 2025.
Decoding price propagation
The period since 2020, marked by events like COVID-19 and the Russia-Ukraine conflict, has driven a global inflationary episode, initially fueled by rising commodity prices.
This context heightened interest in how price increases from upstream supply chains transmit to downstream stages, especially critical for Japan given its prolonged experience with low inflation.
To assess this, the study utilized Final Demand-Intermediate Demand (FD-ID) Price Indexes, which reorganize producer prices by stage of production.
The U.S. Bureau of Labor Statistics first developed these indexes in 2011, and the Bank of Japan's Research and Statistics Department has compiled and released Japan's FD-ID price indexes monthly since June 2022, largely following the U.S. methodology to facilitate cross-country comparisons.
These indexes integrate goods and services, classifying demand into final demand and four intermediate stages, with Stage 1 being the most upstream.
A nuanced shift in Japan's pricing
This study provides crucial statistical evidence of a subtle but significant shift in Japan's pricing behavior.
While overall pass-through remains cautious compared to the US, the increased activity across sectors signals a departure from pre-2020 deflationary inertia.
Policymakers should closely monitor these evolving dynamics for their implications on future inflation targeting and economic stability.