This paper attempts to explain why prices are systematically higher in Japan than in the U.S. It is aimed at measuring direct and indirect productivity and input-price components of sectorial costs of production in Japan relative to the U.S. and presenting a methodology for a bilateral comparison of cost structure by using harmonized input-output tables and purchasing power parity data. The empirical application reveals new elements that explain the difference in costs of production between Japan and the U.S. The main finding is that only in a few industries was the "direct" cost efficiency higher in Japan than in the U.S. during 1985, but even in these industries the "indirect" productivity component was significantly lower than that in the U.S.