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Keywords:

  • deflation;
  • downward nominal wage rigidity;
  • Japanese labor market;
  • Japan's lost two decades;
  • unit labor cost;
  • J60;
  • J30

By using both macro- and micro-level data, this paper investigates how wages and prices evolved during Japan's lost two decades. We find that downward nominal wage rigidity was present in Japan until the late 1990s, but disappeared after 1998 as annual wages became downwardly flexible. Moreover, nominal wage flexibility may have contributed to Japan's relatively low unemployment rates. Although macro-level movements in nominal wages and prices seemed to be synchronized, such synchronicity is not observed at the industry level. Therefore, wage deflation does not seem to be a primary factor of Japan's prolonged deflation.