Markups and Business Dynamism: Firm-level evidence from Japan

This paper examines the level and dynamics of firm-level markups in Japan using firm-level data from the Basic Survey of Japanese Business Structure and Activities and the Economic Census for Business Activity. We construct multiple markup measures—including cost-based, value-added–based, labor-based, and intermediate-input–based markups—using harmonized definitions to ensure comparability across datasets.

We find that, unlike the upward trend documented for the United States, average markups in Japan have remained broadly flat or have declined slightly since the late 1990s. Changes in aggregate markups are driven mainly by within-firm adjustments, while between-firm reallocation and entry–exit effects play a limited role. Moreover, different markup measures exhibit systematically different patterns: labor-based markups are negatively associated with wage growth, suggesting that labor costs are difficult to pass through into prices, whereas non-labor costs are more readily reflected in prices.

These findings indicate that the stagnant markup trends in Japan stem from sluggish dynamic reallocation and specific price pass-through mechanisms, rather than from a decline in competitive pressure.