Sectoral price gaps that were observed in 1990 between Japan and China are studied in this paper. The empirical results show that Japan exhibited producer prices that were higher that those observed in China mainly because it registered higher wages that were only partially offset by higher productivity. The output cost gaps are decomposed into primary-input price differences and differences in productivity levels. The effects arising from the use of direct inputs as well as the indirect effects that are incorporated into the difference of intermediate-input prices are accounted for by means of an input-output decomposition technique.