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(Research Paper) Final Demand-Intermediate Demand Aggregation System of Japan’s Producer Price Index

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June 4, 2021 Moegi Inoue*1 Atsushi Kawakami*2 Ayako Masujima*3 Ichiro Muto*4 Shogo Nakano*5 Izumi Takagawa*6 Full Text [PDF 1,120KB] Reference Material1_Stage Assignments [XLSX 24KB] Reference Material2_Weight Table [XLSX 172KB] Abstract One of the main objectives of the producer price index (PPI) is to serve as an aggregation price index that appropriately represents the overall supply-demand condition regarding goods and services in an economy as a whole. In this respect, the current system of Japan's PPI system is confronted with the following two challenges: (i) overall inflationary pressures in the entire economy cannot be tracked because the indexes for goods and services are separately constructed and published; and (ii) the

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June 4, 2021 Moegi Inoue*1 Atsushi Kawakami*2 Ayako Masujima*3 Ichiro Muto*4 Shogo Nakano*5 Izumi Takagawa*6

Full Text [PDF 1,120KB] Reference Material1_Stage Assignments [XLSX 24KB] Reference Material2_Weight Table [XLSX 172KB]

Abstract

One of the main objectives of the producer price index (PPI) is to serve as an aggregation price index that appropriately represents the overall supply-demand condition regarding goods and services in an economy as a whole. In this respect, the current system of Japan's PPI system is confronted with the following two challenges: (i) overall inflationary pressures in the entire economy cannot be tracked because the indexes for goods and services are separately constructed and published; and (ii) the effects of price changes in upstream stages in the production flow are exaggerated because the PPI is aggregated as the "all commodities index" in which prices of commodities in different demand stages are aggregated through weight-averaging by gross trade value. In order to overcome those challenges, we construct a price index of Final Demand-Intermediate Demand aggregation system of Japan's PPI (the FD-ID price index) by assigning commodity-level Japanese PPI indexes for goods and services to the stage of final demand and the four stages of intermediate demand, in an optimal manner in accordance with the production flow in the Input-Output table and by aggregating the indexes in a way that eliminates multiple counting. The use of the FD-ID price index makes it possible to measure inflationary pressures in the entire Japanese economy, including both goods and services sectors. It also becomes possible to track the process of price changes being transmitted from upstream to downstream stages in the production flow across the sectors of goods and services. This study provides detailed explanations of the methodology for constructing the Japanese FD-ID price index and the characteristics of the constructed index.

Keywords Producer price index; FD-ID aggregation system; Input-Output table; Multiple counting problem.

JEL Classification C82, E31

The authors thank Kosuke Aoki, Shigenori Shiratsuka, and the staff of the Bank of Japan for their valuable comments. We also thank Kotaro Suita for his cooperation in data calculations. We express our appreciation to many staff members of the U.S. Bureau of Labor Statistics, including Bill Thompson, Bonnie Murphy, Greg Kelly, Jeffrey Hill, Jonathan Weinhagen and Tim Wu for having provided detailed, wide-ranging information under an international cooperation program of the bureau. All remaining errors are our own. The views expressed in this study are those of the authors and do not necessarily reflect the official views of the Bank of Japan.

*1Research and Statistics Department, Bank of Japan E-mail: [email protected] *2Research and Statistics Department, Bank of Japan E-mail: [email protected] *3Research and Statistics Department, Bank of Japan E-mail: [email protected] *4Research and Statistics Department (currently, the Institute for Monetary and Economic Studies) , Bank of Japan E-mail: [email protected] *5Research and Statistics Department, Bank of Japan E-mail: [email protected] *6Research and Statistics Department (currently, Financial System and Bank Examination Department), Bank of Japan E-mail: [email protected]

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Bank of Japan
The Bank of Japan (BOJ) also known as Nippon Ginko, is the central bank of Japan. The Bank is often called Nichigin for short. It has its headquarters in Chuo, Tokyo.

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