The Japan-U.S. Price Level Index for Industry Outputs

This paper provides new benchmark estimates of industry-level price differentials between Japan and the United States, based on the input-output framework expanded from the 2005 Japan-U.S. Input-Output Table published in 2013 by the Ministry of Economy, Trade and Industry (METI). The purchasing power parities (PPPs) we construct cover not only the products for final demands, but also the products of outputs and for intermediate uses, using a classification of 174 products. We postulate a price model describing the relationships among producers' prices and purchasers' prices for domestically-produced and imported products, considering the differences in the trade structure, freight and insurance rates, duty tax rates, wholesale and retail trade margins, and transportation costs in each product between Japan and the United States. Using demand-side data for purchasers' price PPPs for final uses (e.g., the Eurostat-OECD PPPs) and for intermediate uses (e.g., the METI survey), producers' price PPPs for outputs are estimated based on our price model and the related parameters. Many sources of data on price differentials by agencies and ministries of the government of Japan are used in this paper. Compared to our previous study in Nomura and Miyagawa (1999), which developed the 1990 benchmark estimates of industry-level price differentials between Japan and the United States, there are several improvements. One improvement is the expansion in the framework and the price model to cover imports from China, Germany, Korea, Malaysia, Taiwan, and Thailand. The second improvement is our revisions on PPPs for wholesale and retail trades. The revisions of PPPs for trade have a considerable impact on the estimates of PPP for gross domestic product (GDP) from the production side. In this paper, we examine Japan's margin rates and provide new estimates by products, based on establishment data from the Census of Commerce in 2002 and 2007 by METI. Our estimates suggest that the margin rates of retail in the official benchmark input-output table may be underestimated. Our estimates enable us to illuminate the sources of price competitiveness through inter-industry transactions. Higher costs of products for intermediate use such as trade, electricity, and other energy in Japan have considerable and wider impacts on the price competitiveness in all industries. Japan's higher costs of trade (54% higher) and electricity (2.0 times higher) contribute to pushing the output prices in the manufacturing sector higher than the United States by 2.8% and 1.1%, respectively.