Although quality adjustment of price indices has been vigorously explored in recent years, the current CPI seems not to have been successful in adjusting their quality change in service sectors. This paper focuses on railways, which are an important form of public transportation in Japan. Using hedonic regressions to adjust the railway fare CPI, the paper reveals the possibility of a significant degree of upward bias in the current CPI. In addition, I calculated 'real output' and the TFP of the Japanese railway industry using the newly adjusted railway fare CPI as a deflator. Contrary to preceding research, the results show that Japanese railway companies have improved their productivity on a 'real' basis.
