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 for household IEs. Under perfect rational expectations, household IEs converge to thesame level regardless of various socioeconomic attributes because IEs reflect all of the available information. However, household surveys revealed that IEs vary significantly depending on households’attributes, which contradictperfect rational expectations. IEs vary according to socioeconomic attributes as follows: (1) Men’s IEs are generally lower than those of women, (2) the higher the income is, the lower the IEs, (3) the higher the educational levelis, 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 positively correlated. The heterogeneity of IEs has significantimplications for central banks’ policy communications with the general public. To increase the efficiency of the communication, central banks should target groups with relatively high IEs, including women, low-income groups,those with a low 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 they exceed a threshold level. Using a threshold model, the following three points were found.First, data derived from the Google Trends analysis of the keyword “inflation” were a successful alternative indicator for households’ inflation attention level. A threshold level was found to be +3.0 percent for the U.S. and +1.5percent for Japan. In Japan, the sampling period needed to include the current inflationary phase, since the economy suffered from a prolonged period of low inflation. In addition, the word “price” in Japanese yielded much morestable threshold level than using “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 developedcountries’ threshold levels were within the range of +2.5% to +3.5%, which were slightly above the central banks’inflation target (2 percent or 1-3 percent). High correlations were found between the threshold levels and averageinflation rates during the sample period, not only among developed countries but also among developing countries with high inflation rates. Third, to check the robustness of the above estimation, threshold levels were estimatedby alternative data derived from the share of “don’t know” answers contained in household inflation expectations surveys. The resulting threshold levels were consistent with the Google Trends analysis. Lastly, the existence ofthe 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 inflationary phase.
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 currentinflationary period. Larger firms showed lower IEs than smaller ones. 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 IEs reflecting the size of firms and (2) upward bias against actual CPI. Simultaneously, firmsshow rational behaviors, such as assigning higher priority to monitoring IEs, when actual inflation soars. Rational inattention (RI) theory became a useful framework for explaining such seemingly inconsistent firms’ behaviors. RIassumes that firms intentionally and rationally ignore the information which have relatively small value for the their 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 areobserved 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 formation mechanism 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 and implications for monetary policy implementation. Inflation perceptions attracted relativelylittle attention until recently because they had constantly 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 constantly exceeding the CPI. The first is a lack of households’ basic knowledge regarding theCPI. 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 perceptions and expectations in the same way. Second, according to household surveys,households heavily rely on inflation perceptions when responding to inflation 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 gas prices 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 inflation perceptions
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 relatively unstable compared with those of European and U.S. households. Japanese householdinflation 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-ahead expectations. Second,during the current inflationary phase, inflation expectations suddenly became unstable, since they rose to +10 percent for one-year-ahead expectations and +5 percent for five-years-ahead expectations. Both expectations exceededthe 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 significantly higher than other countriesduring the currentinflationary phase. The contrast is especially remarkable in thecase of five-years-ahead expectations, 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 household inflation 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 toinvestment instruments. There are three points for discussion; (1) whether U.S. households’ allocationpattern should beused as a benchmark,(2) the effects of long-term stagnation of the Japanese economy on households’ asset accumulation,and (3) the macroeconomic impact of asset relocation. Regarding the first point, thefinancial asset allocation patterns of U.S. households are severely affected by the top 5 percent asset group, whose risk-asset ratio is significantly higher thanaverage households. Therefore, great caution should be exercised whenusing the U.S. allocation pattern, derived from theaggregate household financial assets, as a benchmark for policies aimed at relocating Japanese households’ financial assetstoward risky assets. Regarding the second point, thegrowth rate of Japanese households’ financial assets are distinctlylower than that of U.S. households. This is mainly owing to long-term stagnation of the Japanese economy and sluggish stockprices. Additionally, the low risk-asset ratio among the Japanese younger generation is not caused by their risk aversion, butmainly because of liquidity constraints resulting from holding risky nonfinancial assets, such as real estate. Regarding thethird point, thecorporate sector remains a fund-surplus sector in Japan. This implies that its growth is not hampered byliquidity constraints and that shifting households’ bank deposits to risky assets will not accelerate the Japanese economy’sgrowth rate. Conversely, as the economy grows faster, households will spontaneously increase investments in risky assets asdisposable 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 begun direct policy communication with the general public. The objective of such movementsis to stabilize publicinflation expectations to increase the effectiveness of monetary policy and improve the credibility of central banks. Thelatter’s communication with the general public has generated new problems, such as howto attract the public’s attentionwhen most of them are indifferent to policy communications and how to support the public’s understanding of policycommunication. This study proposes applying behavioral economics to copewith such problems, which are closely related tothree behavioral biases: information overload, myopic behaviors, and overconfidence. Reducing the volume of informationprovision, decreasing the difficulty of the content, andchanging the design of banks’ websites are required to offsetinformation overload. Incentives are needed to restrain myopic behaviors. These include utilizing “teachable moments” andemphasizing “relativity.” Countermeasuresfor overconfidence 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 gender gap observed? (2) What are the implications of gender gap for Japanese women?Regarding the firstquestion, there is no clear consensus about the reasons for the gender gap, inside and outside Japan. A widely shared viewamong experts is that “no single factor can explain the phenomena and furtherinvestigation is warranted.” This is due tofact that socio-demographic factors have only limited statical explanatory power, and that a significant number of conflictingevidences have emerged against the division of housework loadhypothesis. An alternative hypothesis is the effects of socialconventions, which seem to work but are not easy to convert to economic data.Regarding the second question, this studystressed the Japanese women’s need for ahigher level of financial literacy. As the average life-expectancy of women islonger than that of men, women need a larger amount of financial assets than men do, despite lower income and pensionbenefits compared to men. Inaddition to the gender gap in financial literacy, Japanese women showed (1) low self-assessment of their financial literacy; (2) low-confidence in financial transactions; and (3) better financial attitudes/behaviors compared to men,despite the low level of financial knowledge.To close the gender gap in financial literacy inJapan, financial education, particularly designed for women, should be promoted. For this purpose, there is a strong need toshare thegender gap issue with women and those participating in financial education, and to further investigate the reason.