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 thresholdmodel, 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 +1.5 percent for Japan. In Japan, the sampling period needed to include the current inflationaryphase, since the economy suffered from a prolonged period of low inflation. In addition, the word “price” in Japanese yielded much more stable 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 werefound between the threshold levels and average inflation rates during the sample period, not only among developed countries but also among developing countries with high inflationrates. Third, to check the robustness of the above estimation, threshold levels were estimated by alternative data derived from the share of “don’t know” answers contained inhousehold inflation expectations surveys. The resulting threshold levels were consistent with the Google Trends analysis. Lastly, the existence of the threshold levels has implicationsfor 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 current inflationary period. Larger firms showed lower IEs than smaller ones. Furthermore, firms' IEs lie between those of households andprofessionals.
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) upwardbias against actual CPI. Simultaneously, firms show rational behaviors, such as assigning higher priority to monitoring IEs, when actual inflation soars. Rational inattention (RI) theorybecame a useful framework for explaining such seemingly inconsistent firms’ behaviors. RI assumes that firms intentionally and rationally ignore the information which have relativelysmall 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 currentinflationary 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 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 policyimplementation. Inflation perceptions attracted relatively little attention until recently because they had constantly exceeded the actual CPI and were considered unreliable. This attitudehas 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 ofhouseholds’ 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 qualityadjustments. 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 individualsample 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 Europeanand U.S. households. Japanese household inflation expectations show certain unique features. First, they consistently move above the Consumer Price Index (CPI) and closely followthe movement of CPI, especially in the case of one-year-ahead expectations. Second, during the current inflationary phase, inflation expectations suddenly became unstable, since theyrose to +10 percent for one-year-ahead expectations and +5 percent for five-years-ahead expectations. Both expectations exceeded the actual CPI at the time. Third, although the peaklevel of CPI was lower in Japan than in the U.S. and European countries,Japanese inflation expectations were significantly higher than other countriesduring the current inflationaryphase. 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 areclosely 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 fordiscussion; (1) whether U.S. households’ allocation pattern should beused as a benchmark,(2) the effects of long-term stagnation of the Japanese economy on households’ assetaccumulation,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 thetop 5 percent asset group, whose risk-asset ratio is significantly higher thanaverage households. Therefore, great caution should be exercised when using 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 secondpoint, the growth 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 economyand sluggish stockprices. Additionally, the low risk-asset ratio among the Japanese younger generation is not caused by their risk aversion, butmainly because of liquidity constraintsresulting from holding risky nonfinancial assets, such as real estate. Regarding thethird point, the corporate sector remains a fund-surplus sector in Japan. This implies that its growth isnot hampered byliquidity constraints and that shifting households’ bank deposits to risky assets will not accelerate the Japanese economy’sgrowth rate. Conversely, as the economygrows 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 thegeneral public. The objective of such movements is to stabilize publicinflation expectations to increase the effectiveness of monetary policy and improve the credibility of centralbanks. Thelatter’s communication with the general public has generated new problems, such as how to attract the public’s attentionwhen most of them are indifferent to policycommunications and how to support the public’s understanding of policycommunication. This study proposes applying behavioral economics to cope with such problems, which areclosely related tothree behavioral biases: information overload, myopic behaviors, and overconfidence. Reducing the volume of informationprovision, decreasing the difficulty of thecontent, and changing the design of banks’ websites are required to offsetinformation overload. Incentives are needed to restrain myopic behaviors. These include utilizing “teachablemoments” andemphasizing “relativity.” Countermeasures for 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 theimplications 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 widelyshared viewamong experts is that “no single factor can explain the phenomena and further investigation is warranted.” This is due tofact that socio-demographic factors have onlylimited statical explanatory power, and that a significant number of conflictingevidences have emerged against the division of housework load hypothesis. An alternative hypothesis isthe 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 fora higher 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 lowerincome and pensionbenefits compared to men. In addition 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 financialliteracy inJapan, financial education, particularly designed for women, should be promoted. For this purpose, there is a strong need toshare the gender gap issue with women and thoseparticipating in financial education, and to further investigate the reason.