The Unique Features of Japan's Inflation Expectations of Households and Firms during the Current InflationaryPeriod
This study compared inflation expectations (IEs) of Japanese households and firms against those of major advanced countries at the end of 2024, when surgesin inflation rates subdued in overseas economies. In many advanced countries, the following facts were observed: (1) peak-rates of inflation reached 5 to 8 %,(2) after peaking out, both inflation rates and IEs converged to approximately 3 %, (3) long-run IEs remained relatively stable during the inflationary period. Thedevelopments in Japan’s IEs were as follows: (1) oneyear-ahead IEs of households reached 10%, which was more than double the amount of CPI increaserates, (2) five-year-ahead IEs also reached 5% at theirpeak level, (3) firms’ IEs were more restrained than those of households, and (4) both the short- and long-term IEs of households and firms remained elevated even after the CPI peaked. Compared to the IEs of other advanced countries, Japan’s IEs showed uniquefeatures, such as that (1) no other countries besides Japan experienced one-year-ahead IEs substantially exceeding the CPI and marking the highest value amongthe advanced countries, (2) unlike most advanced countries, Japan’s IEs have not converged to approximately 3 % level, (3) Japan’s five-year-ahead firm IEscontinued an increasing trend at the end of 2024. Such unique features of Japanese IEs seemed to be related to remaining at a high level of the CPI and to thelarger upward bias of Japanese households’ IEs compared to other countries. Thus, this require continued close monitoring.
Heterogeneity of Households inflation expectations
This study analyzed the heterogeneity of household inflation expectations (IEs) and showed that the perfect rational expectations do not hold forhousehold IEs. Under perfect rational expectations, household IEs converge to the same level regardless of various socioeconomic attributesbecause IEs reflect all of the available information. However, household surveys revealed that IEs vary significantly depending on households’attributes, which contradict perfect rational expectations. IEs vary according to socioeconomic attributes as follows: (1) Men’s IEs are generallylower than those of women, (2) the higher the income is, the lower the IEs, (3) the higher the educational level is, the lower the IEs, (4)pensioners and the unemployed showed high IEs, and (5) the relationship between age and IEs is mixed, although in Japan, both are positivelycorrelated. The heterogeneity of IEs has significant implications for central banks’ policy communications with the general public. To increase theefficiency of the communication, central banks should target groups with relatively high IEs, including women, low-income groups, those with alow educational background, and, in the case of Japan, older adults.
Japanese Households' Inflation Attention Thresholds
This study analyzed the rational inattention hypothesis where households’inflation attention become responsive to inflation rates once theyexceed a threshold level. Using a threshold model, the following three points were found.First, data derived from the Google Trends analysis of thekeyword “inflation” were a successful alternative indicator for households’ inflation attention level. A threshold level was found to be +3.0percent for the U.S. and +1.5 percent for Japan. In Japan, the sampling period needed to include the current inflationary phase, since theeconomy suffered from a prolonged period of low inflation. In addition, the word “price” in Japanese yielded much more stable threshold level thanusing “inflation” or “infure.” (a Japanese word equivalent to “inflation” in the U.S.). Second, threshold levels were calculated for 21 countries.Except for Switzerland and Japan, most developed countries’ threshold levels were within the range of +2.5% to +3.5%, which were slightly abovethe central banks’inflation target (2 percent or 1-3 percent). High correlations were found between the threshold levels and average inflationrates during the sample period, not only among developed countries but also among developing countries with high inflation rates. Third, to checkthe robustness of the above estimation, threshold levels were estimated by alternative data derived from the share of “don’t know” answerscontained in household inflation expectations surveys. The resulting threshold levels were consistent with the Google Trends analysis. Lastly, theexistence of the threshold levels has implications for monetary policy such as flattening Phillips curve during low inflation periods.
Japanese Firms’ Inflation Expectations during the Current Inflationary Phase
This study analyzed Japanese firms’ inflation expectations (IEs) and their formation mechanism during the current inflationaryphase.
First, analyzing Tankan data revealed that Japanese firms’ IEs moved around 1 percent before the pandemic. This rose to 3 percent for one-year-ahead and about 2 percent for five-year-ahead expectations during the current inflationary period. Larger firms showed lower IEs than smallerones. Furthermore, firms' IEs lie between those of households and professionals.
Second, firms’ IE formation mechanism is neither perfectly rational nor adaptive. Firms are irrational due to (1) the wide dispersion of IEsreflecting the size of firms and (2) upward bias against actual CPI. Simultaneously, firms show rational behaviors, such as assigning higher priorityto monitoring IEs, when actual inflation soars. Rational inattention (RI) theory became a useful framework for explaining such seeminglyinconsistent firms’ behaviors. RI assumes that firms intentionally and rationally ignore the information which have relatively small value for thetheir activities.
Third, Japanese firms' IEs are not anchored at the 2 percent inflation target.Even the longer-term IEs, such as three- and five-year-ahead ones,have clearly increased during the current inflationary phase. Similar patterns are observed in the U.K., Italy, and other major developed countries.
Since data and studies on firms’ IEs are limited, further research challenges include accumulating related data and analyzing the formationmechanism of IEs.
Japanese Households' Inflation Perceptions: The Formation Process and Their Relationship with Inflation Expectations
This study examined the formation process of household inflation perceptions as well as their relationship with inflation expectations andimplications for monetary policy implementation. Inflation perceptions attracted relatively little attention until recently because they hadconstantly exceeded the actual CPI and were considered unreliable. This attitude has changed as inflation perceptions became considered the
basis for forming inflation expectations. At the same time, the following reasons are offered to account for the inflation perceptions constantlyexceeding the CPI. The first is a lack of households’ basic knowledge regarding the CPI. The second is people’s tendency toward loss aversion.The third is households’ lack of awareness of the CPI’s quality adjustments. Regarding the relationship between inflation
perceptions and expectations, the following evidence was found. First, socioeconomic attributes of consumers affect both inflation perceptionsand expectations in the same way. Second, according to household surveys, households heavily rely on inflation perceptions when responding toinflation expectations. Third, crosssectional analysis using individual sample data shows strong correlations between
the inflation expectations and perceptions. Such features of inflation perceptions have monetary policy implications. First, although food and gasprices are excluded from the “core-core CPI,” they should be monitored closely. Second, differences in inflation expectations caused by socio-economic attributes distort efficient resource allocation. Third, households’ financial literacy should be improved. Future
challenges in this field include further data accumulation, which enables detailed studies on the formation process of inflationperceptions
Instability of Japanese Household Inflation Expectations During the Current Inflationary Phase
This study analyzed Japanese household inflation expectations during the current inflationary phase and concluded that they are relativelyunstable compared with those of European and U.S. households. Japanese household inflation expectations show certain unique features. First,they consistently move above the Consumer Price Index (CPI) and closely follow the movement of CPI, especially in the case of one-year-aheadexpectations. Second, during the current inflationary phase, inflation expectations suddenly became unstable, since they rose to +10 percent forone-year-ahead expectations and +5 percent for five-years-ahead expectations. Both expectations exceeded the actual CPI at the time. Third,although the peak level of CPI was lower in Japan than in the U.S. and European countries,Japanese inflation expectations were significantlyhigher than other countriesduring the current inflationary phase. The contrast is especially remarkable in thecase of five-years-aheadexpectations, where those of the U.S. and European countries were barely affected by the rises in CPI. Further analysis on the stability
of Japanese inflation expectations in different economic circumstances is required, such as an examination of the mechanisms behind householdinflation perceptions,since these are closely related to inflation expectations.
Japanese Households' Financial Asset Allocation: A Critical Study of the Government's Asset Relocation Policy
This study critically analyzes the Japanese government’s policy to shift households’ financial assets from bank deposits toinvestmentinstruments. There are three points for discussion; (1) whether U.S. households’ allocation pattern should beused as a benchmark,(2) the effectsof long-term stagnation of the Japanese economy on households’ asset accumulation,and (3) the macroeconomic impact of asset relocation.Regarding the first point, the financial asset allocation patterns of U.S. households are severely affected by the top 5 percent asset group, whoserisk-asset ratio is significantly higher thanaverage households. Therefore, great caution should be exercised when using the U.S. allocationpattern, derived from theaggregate household financial assets, as a benchmark for policies aimed at relocating Japanese households’ financialassetstoward risky assets. Regarding the second point, the growth rate of Japanese households’ financial assets are distinctlylower than that ofU.S. households. This is mainly owing to long-term stagnation of the Japanese economy and sluggish stockprices. Additionally, the low risk-assetratio among the Japanese younger generation is not caused by their risk aversion, butmainly because of liquidity constraints resulting fromholding risky nonfinancial assets, such as real estate. Regarding thethird point, the corporate sector remains a fund-surplus sector in Japan. Thisimplies that its growth is not hampered byliquidity constraints and that shifting households’ bank deposits to risky assets will not accelerate theJapanese economy’sgrowth rate. Conversely, as the economy grows faster, households will spontaneously increase investments in risky assetsasdisposable income increases and liquidity constraints are relaxed.
Application of Behaviral Economics to the Central Bank's Communication with the General Public
Until recently, the central bank’s main target for policy communication was financial professionals. However, major centralbanks have begundirect policy communication with the general public. The objective of such movements is to stabilize publicinflation expectations to increase theeffectiveness of monetary policy and improve the credibility of central banks. Thelatter’s communication with the general public has generatednew problems, such as how to attract the public’s attentionwhen most of them are indifferent to policy communications and how to support thepublic’s understanding of policycommunication. This study proposes applying behavioral economics to cope with such problems, which are closelyrelated tothree behavioral biases: information overload, myopic behaviors, and overconfidence. Reducing the volume of informationprovision,decreasing the difficulty of the content, and changing the design of banks’ websites are required to offsetinformation overload. Incentives areneeded to restrain myopic behaviors. These include utilizing “teachable moments” andemphasizing “relativity.” Countermeasures foroverconfidence include encouraging citizens to take a mini quiz.
Gender Gap in Financial Literacy: A Case Study of Japan
This study discussed the gender gap in financial literacy in Japan. Specifically, we proposed two questions, as given below.(1) Why is the gendergap observed? (2) What are the implications of gender gap for Japanese women? Regarding the firstquestion, there is no clear consensus aboutthe reasons for the gender gap, inside and outside Japan. A widely shared viewamong experts is that “no single factor can explain the phenomenaand further investigation is warranted.” This is due tofact that socio-demographic factors have only limited statical explanatory power, and that asignificant number of conflictingevidences have emerged against the division of housework load hypothesis. An alternative hypothesis is theeffects of socialconventions, which seem to work but are not easy to convert to economic data.Regarding the second question, thisstudystressed the Japanese women’s need for a higher level of financial literacy. As the average life-expectancy of women islonger than that ofmen, women need a larger amount of financial assets than men do, despite lower income and pensionbenefits compared to men. In addition to thegender gap in financial literacy, Japanese women showed (1) low self-assessment of their financial literacy; (2) low-confidence in financialtransactions; and (3) better financial attitudes/behaviors compared to men, despite the low level of financial knowledge.To close the gender gap infinancial literacy inJapan, financial education, particularly designed for women, should be promoted. For this purpose, there is a strong needtoshare the gender gap issue with women and those participating in financial education, and to further investigate the reason.