Comment on “Product Downsizing and Hidden Price Increases: Evidence from Japan's Deflationary Period”

Abstract

economies. To my limited knowledge as a former practitioner of monetary policy, Imai and Watanabe are the first to show that Japan’s prices behave differently from those in the USA, in two ways. First, although mostly focused on supermarket items, Imai and Watanabe are able to show that deflation in the CPI for this category in the past several years is in fact associated with quality downgrades, so that the quality-adjusted prices did not fall as much as the official CPI suggested. Although there are methodological differences between this paper (using the geometric average of prices) and the CPI (using a consumption-basket weighted average of “representative” products’ prices), Imai and Watanabe’s price index “declined by about 16% in 2000‐2012, with the rate of deflation per year being 1.3%,which is comparable to the figures for the corresponding items in the official CPI.” In contrast, the corresponding quality-adjusted price index (per-unit price taking account of downsizing) fell far less than the unadjusted price index and the corresponding CPI component. This suggests a downward bias in the official CPI component. Second, this downward bias is not inconsequential because Japanese consumers base their consumption on quality-adjusted prices, not the quality-unadjusted price tags. Failure to recognize this downward bias may lead to a false assessment of inflationary dynamics. In fact, Japanese consumers are keenly aware that downsizing implies an increasing price, in a sharp contrast with their American counterparts, who tend to be more sensitive to the price tag (quality-unadjusted price) than the per unit price (quality-adjusted price). To put this differently, Japanese consumers are more rational (in an economic sense) than the US consumers studied by Gourville and Koehler (2004). Moreover, the Japanese consumers seem more to be more than simply rational: the majority of Japanese consumers appreciate upsizing and detest downsizing independently of the per-unit price. This may be interpreted as an appreciation of these firms’